World stock markets tumbled after China unexpectedly raised interest rates in an attempt to cool its economic growth. BHP Billiton and Kazakhmys led London's decline on fears that valuations in the commodity sector have outgrown a earnings outlook.
There were bright spots. Pharmaceuticals shares traded higher after earnings from Britain's big-three drug makers topped expectations, while PartyGaming led betting stocks higher after a major US lobby group came out against industry prohibition.
But the mining weakness, along with a profit warning from Smith & Nephew and an unwinding of bid speculation around Centrica, all conspired to push London benchmarks sharply lower. After testing a five-year high yesterday, the FTSE 100 index closed down 44.3 at 6060.0. The FTSE 250 retreated from last session's record with a loss of 72 at 9925.6.
The picture was similarly negative across Europe, where indices had eased in reaction to a reminder from Nicholas Garganas, a European Union governing council member, that interest rates will be going up and inflation risks have increased. Germany's DAX lost 0.6 per cent and France's CAC was down 0.7 per cent.
Meanwhile, across the Atlantic, the Dow Jones Industrial Average rebounded from an initial 80-point loss to stand barely changed at around 11340. An earnings miss from ExxonMobil had exacerbated the initial fall, which then reversed as Ben Bernanke, the Federal Reserve chairman, said in congressional testimony that a pause in the current interest rate hiking cycle is possible.
For an overview of world markets, click here.
BHP Billiton was among London's weakest natural resources markets after Goldman Sachs analysts cut the world's No 1 miner from its "outperform" list, moving to "in-line". "While its growth profile remains relatively strong, the recent price rally means that it looks to be close to our fair value of 1200p, suggesting that the growth is largely priced in," the Wall Street broker told clients.
Goldman noted that, because BHP mines for a wide variety of commodities, it is not as geared to metals market prices as others in the sector, such as Vedanta Resources. Dealers also pointed to a disappointingly weak production update from BHP yesterday, which underlined that record metals prices will only feed through to earnings if you can get the stuff out of the ground.
The broader mining sector weakness could be pinned on worries about slowing growth as People's Bank of China unexpectedly raised its base interest rate, the first hike since October 2004.
The central bank's one-year lending rate will increase to 5.85 per cent from 5.58 per cent -- a move aimed at aimed at slowing the nation's credit and investment boom that some believe is threatening to overheat. China's economy grew at 10.2 per cent in the first quarter, the fastest pace of any developed nation.
BHP, which has climbed from 916p in the past month, finished the day lower by 33.5p at 1138.5p. Peer Xstrata eased 66p to £20.15 despite Goldman moving to "in-line" from "underperform", while mid-cap Vedanta lost 50p to £15.70.
Among the energy producers, BP lost 14.5p to 683.5p and Shell fell 45p to £19.93. New York's default oil contract dropped more than a dollar for the third straight day in response to the rates news from Beijing, the disappointing Exxon figures, and yesterday's weekly reserve data that showed a smaller-than-expected drawdown from US reserves. Crude was lately at about $71.10 a barrel.
It was a volatile day on the London Metals Exchange, were bulks such as copper and zinc were trading off their weakest levels as investors questioned to what degree today's rate hike will slow China's boom. The Fed Chairman's remarks also helped, with a weaker US dollar making greenback-denominated contracts cheaper for investors using other currencies.
Track today's trading by industry sector here.
Leading FTSE 100 loserboard, Smith & Nephew tumbled 48p to 462p after the orthopaedic devices maker cut its current-year growth guidance. It complained that first-quarter earnings were hit by government spending cutbacks and a move to restructure its business divisions.
"Conditions have been tougher during the first quarter, not only in the US, but also in the UK and Germany where we have been affected by healthcare budget constraints," S&N said.
Quarterly earnings fell 5 per cent to 9.7 cents per share, worse than the City's most pessimistic prediction of 9.8 cents. Management also cut a forecast for 2006 underlying earnings growth to between 4 per cent and 6 per cent, from up to 8 per cent previously. The warning was particularly unexpected after US peers such as Stryker and Zimmer had recently pointed to improvement in the implants marketplace.
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British Gas owner Centrica retreated by 8.5p to 298.75p, having been lifted yesterday by hopes Gazprom will make a bid. The Russian gas group confirmed earlier this week that Centrica was on its list of potential targets, and the government was reported yesterday to have said it would not actively seek to block any approach. Gazprom tried to calm the speculation this morning, telling one paper that it was concentrating on its own new projects.
JP Morgan was recommending its clients take profits in Centrica. The US bank reckoned shares were 12 per cent overvalued on fundamentals, and no other bidder beyond Gazprom could possibly justify a paying a premium of the current price. But the Russian group has more than 10 potential targets on its watch list, and is already in talks about breaking the UK market via a potential pact with E.ON, owner of Powergen, JPM highlighted.
"Centrica looks by no means a cetrain target," said JP Morgan. "A bid for either Scottish Power or Scottish & Southern Energy would be more politically acceptable and ... potential returns from a bid for Scottish & Southern could also be far more attractive."
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Fellow utility British Energy slid for a second day on continued concern about a sharp fall in in price of European Union carbon emission trading permits, and what that may mean for power prices. (For more on this story, see yesterday's market report.) British Energy eased 24.5p to 657.5p and peer generator Drax Group retreated 26p to 767p.
For detailed information on British Energy here.
Aviva, Britain's biggest insurer, lost 11p to 801.5p even after it beat expectations with a first-quarter sales, supported by 27 per cent growth in the UK as the company went for volume rather than profit margins. It revealed new business sales for the first three months of 2006 of £6.788 billion, up 20 per cent from £5.659 billion a year earlier and topping forecasts centred around £6.075 billion.
UBS, which rates Aviva "neutral", said it was leaving its forecasts unchanged. "The shares have been held back by concerns that the offer for Prudential indicated a decline in its prospects and fears of dilutive acquisitions elsewhere. These numbers are likely to help alleviate the former concerns," it said.
For more on Aviva, click here.
PartyGaming closed the day as the top blue-chip gainer after the American Gaming Association tweaked its stance on online gambling, a move investors saw as increasing the likelihood that legislation attempts will fail.
The industry lobby group, which had previously abstained from the issue, released a statement saying it "strongly supports the creation of a Congressional study" to look at whether legalising and regulating internet gambling might be a more viable alternative to prohibition. US legislature currently has three gambling bills going through the system, two of which are due to go to committee vote on May 10.
Deutsche Bank's team said AGA the news was helpful to sentiment, even though did nothing to change the status quo given the difficulties involved in framing any legislation. It told clients: "This adds support to our view that ultimately the proposed bills will not get passed, and initiating a study might even provide a politically preferable alternative to passing prohibitive legislation for many in Congress."
PartyGaming, which runs the world's biggest poker site, added 6.75p to 152.75p. 888 Holdings, operator of the largest internet casino, gained 7p to 244p.
For detailed information on PartyGaming, click here.
AstraZeneca was also on the short list of blue-chip risers, up 64p to £30.55. Europe's No 3 drugs company posted a profit before tax of $2.044 billion for the three months through March, up 38 per cent on a year earlier and easily beating market expectations. Astra also raised its earnings forecast for 2006, which included a boosted contribution from the Toprol-XL pill because it has not yet faced generic competition.
While the market reaction was positive, some stock watchers noted that the earnings beat was delivered through lower research and development spending. Sales, up 8 per cent at $6.18 billion, were considerably lower than analysts had forecast.
For more on AstraZeneca, click here.
Lower-than-expected costs also benefited Shire, whose 46 per cent profit increase topped market expectations. The group said it was still in talks with generics maker Bell Pharma over its attempts clone the Shire's Adderall-XR hyperactivity treatment. Shares inched ahead 12.5p to 863.5p.
Meanwhile, GlaxoSmithKline revealed profit up 27 per cent for its fourth quarter and said it was on track to hit its full-year earnings target. Europe's biggest drug maker posted earnings were £2.17 billion over the three months, on sales up 15 per cent at £5.81 billion. Glaxo shares closed out with a gain of 46p at £15.32.
For stories on the health care sector, click here.
Also outperforming, Vodafone rose 2.75p to 130.5p after completing the sale of its Japan unit to Softbank for £8.9 billion, exactly as expected. Apropos nothing more substantial, the talk among dealers returned to whether or not Vodafone would now sell its minority stake in Verizon Wireless.
Goldman Sachs, which suspended sell-side coverage on Vodafone while its buy side advised on the Softbank deal, restarted coverage today with an "in-line" rating. Instead, it advised clients to sell covered calls -- a means whereby traders can profit from a range-bound market by holding a stock while simultaneously covering it with a short position.
Vodafone's inexpensive valuation limits downside from current levels, while competitive pressure and limits upside, it argued. And, while speculation about a Verizon Wireless deal may lift the shares, that will be limited by uncertainty regarding use of proceeds.
For details about Vodafone, click here.
Halma was among the FTSE 250's top performers, gaining 8p to 188p. The sensor and gauge maker said fiscal full-year profit before tax from its continuing operations would be "slightly ahead of the top end of market forecasts".
Analysts said Halma was benefiting from a new direction under Andrew Williams, its new chief executive, rather than any major rebound in its end markets.
"A year on from Andrew Williams appointment, Halma is rediscovering its ability to achieve growth and give the market positive surprises," said Dresdner Kleinwort, which raised its Halma rating to "buy" from "hold". End markets are improving but the markets for the largest division, Infrastructure Sensors, have yet to pick up strongly. ... With growth coming through, full-year 2006 should maintain good progress."
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IT firm Computacenter climbed 8p to 255p on hopes that an AGM trading statement, due early in May, will show its market has improved.
March, the end of the tax year, is increasingly becoming Computacenter's key month due to increased enterprise revenue, which are more back-end loaded than its traditional PC hire business.
Computacenter's management said at its recent full-year results January and February trading were lower compared with last year but added that it was too early to call March. Deutsche Bank argued that, because of the increased seasonality, that was no cause for concern and full-year expectations "should remain broadly stable".
For detailed information on Computacenter, click here.
On broker watch:
UBS cut EMI to "neutral" from "buy" and raised Friends Provident to "buy" from "neutral".
Panmure Gordon lifted Emap to "buy" from "hold".
ING upgraded SABMiller to "hold" from "sell".
And Deutsche Bank lowered Whitbread to "hold" from "buy".
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