Market Report: Heavy mining sell-off casts gloom over market

For once, the mining sector failed to prop up the rest of the market – without London's significant exposure to resource stocks the market would surely be significantly lower by now. But traders sold the miners heavily, with some even questioning the logic behind BHP Billiton's bid for Rio Tinto.

The broker Landsbanki cut its rating on BHP to "reduce" from "buy", telling clients that the deal may prove to be too expensive to be worth pursuing, and that BHP could end up paying far more for Rio Tinto than it currently proposes. BHP closed 83p lower at 1,519p, while Rio Tinto closed 327p worse at 5,053p.

Other mining stocks were also subject to some severe profit-taking – Xstrata closed 238p worse at 3,043p, and Lonmin shed 238p to 2,859p. One trader said that the big falls in mining stocks were potentially a very bad sign for the rest of the market. He said: "If punters are clearing out of the good stuff as well as the bad, this market is only heading in one direction."

Standard Chartered was one of only a very small handful of bright spots in the blue chips. Reports have indicated that certain Chinese banks are keen on making a bid for Temasek's 17 per cent stake, helping Standard Chartered, probably the only major UK bank largely unscathed by the sub-prime crisis, to close 15p better at 1,679p.

Citigroup chose a bad day to upgrade its strategy to "overweight" on the banking sector. The broker told clients: "We are raising the banks industry group to 'overweight' ... reflecting compelling valuation, depressed earnings revision data and awful investor sentiment. Moreover, dividend yields have climbed to near previous peaks which have been associated with stock price lows in the past." The note had little impact in the face of an overwhelming bearish market mood. Barclays fell another 18p to 491p, Royal Bank of Scotland shed 22.5p to 404p and Alliance & Leicester closed 25.5p worse at 581.5p.

Traders were prepared for a bad day in the markets after news of the disappointing Northern Rock bids. Investors were happy to take profits as Wall Street quickly moved into triple-digit losses. By the close, the FTSE 100 was 170.4 worse at 6,120.8, and the selling pressure was felt across the market.

Mid-cap oils were lower, despite the price of oil rallying once again to touch $94 a barrel. Most of the selling came as Eni pulled out of its proposed bid for Burren Energy, which closed 173p worse at 1,015p. Mid-cap rivals Cairn Energy shed 81p to 2,216p, Soco International lost 23p to 2,310p while Premier Oil fell 59p to 1,105p, despite signing a "significant milestone" agreement to sell more gas to the Jurong petrochemical complex in Singapore.

Paragon Group, the mortgage lender, was sharply lower ahead of today's interim results. Not surprisingly, the stock has been haemorrhaging value over the past six months, but the grim newsflow from Northern Rock prompted investors to head for the exit ahead of the results. The shares lost another 11.6 per cent of their value to close at 204.25p, down 26.75p.

The Swiss-based iron-ore group Ferrexpo was also out of favour, tanking to close 30p worse at 205p. The shares spiked in early September on the back of a handful of takeover rumours, but investors have tired of waiting for news and bailed out yesterday, sending the shares close to the top of the fallers list.

Marchpole shareholders were left nursing some pretty nasty wounds after the clothing design and distribution company warned that full-year results would be below forecasts. Interim results were ghastly, and the shares were left looking as out-of-fashion as a pair of fluorescent laces, tanking by over a third to close at 64.5p, down 35p.

The marine and offshore fluid handing group Hamworthy was also heading in the wrong direction, closing 128p worse at 507p. The company was only named as Aim Bulletin company of the year two weeks ago, and fell sharply despite posting a solid set of interim numbers. The stock has been an excellent performer since coming to the market at under 150p just over three years ago, and most of the selling was down to investors banking some of their gains.

An encouraging statement from Cluff Gold helped the shares to stage a decent rally against the market trend, closing 11.5p better at 102p, the first time the shares have passed 100p. The company told investors that it anticipates a move into production at its two sites in the first half of 2008 with production of 100,000 ounces of gold.

Finally, Johnson Service staged another rally, up 5.75p at 85.75p, as rumours of a private equity buyout did the rounds again. The struggling dry cleaner has lost more than 80 per cent of its value in the past 12 months, and most traders do not expect a bid at a significant premium to the current price.