The FTSE 100 came off the boil last night, with leading miners falling prey to a round of profit-taking amid worries about the sustainability of the recent strength in the price of copper.
Citigroup sounded the alarm, saying that while it believed that both metals and miners had slumped to trough levels, copper, the rising price of which has been among the key drivers of the recent sector-wide rally, may ease as the reality of softer demand and the limits of Chinese stockpiling return to the fore.
"While other base metals are growing steadily but unspectacularly off their base (which is in keeping with the still difficult demand and inventory environment) copper has been roaring ahead as though the new demand and inventory cycles are well under way," the broker said, highlighting the fact that much of the discrepancy between the price of copper and that of other base metals has been a result of Chinese stockpiling.
"The risk in relying too much on the Chinese copper stockpiling is that [they are] unlikely to be 'buyers at any price'," Citi added.
"It made sense for them to accumulate the abundantly available excess copper supplies at lower prices, but at some point they are going to conclude that the Western market has 'seen them coming' and priced up the metal too much too soon."
The concerns bore on blue chip copper plays such as Eurasian Natural Resources Corporation, which retreated to 508p, down 12.3 per cent or 71p, and Kazakhmys, which was 9.7 per cent or 50p weaker at 464.5p.
Overall, weak sentiment in the mining sector, coupled with afternoon losses for the banks, sent the FTSE 100, which was 2.5 per cent or 101.94 points weaker at 3990.86, back below the 4000-mark. The FTSE 250 also had a rough session, falling to 7016.68, down 4 per cent or 291 points.
There was also some caution ahead of the budget, which is due to be unveiled by the Chancellor tomorrow, with Goldman Sachs highlighting a list of companies that might suffer as the Government pares back its spending commitments.
"We believe a tightening in fiscal policy is likely over the next few years following the rapid deterioration in UK public finances over the last few months," the broker said.
"We expect this to translate into declines in real procurement spending from 2010, with important implications for companies that sell to the public sector."
The financial sector was also wrong-footed by Bank of America, which posted forecast-beating results, but warned on the outlook for bad debts, which are expected to rise as the global economic slowdown gathers pace.
Barclays, which is due to hold its annual general meeting later this week, was among the hardest hit, falling to 209p, down almost 8 per cent or 18p, while Standard Chartered, which has often evoked concern owing to its exposure to emerging markets where bad debts are forecast to climb higher, was just over 6 per cent or 61.5p weaker at 942.5p.
Also on the downside, travel group Thomas Cook, down 11.3 per cent or 32.5p at 252.75p, tumbled as hopes of bid from Arcandor, its majority shareholder, faded after the German group unveiled a far-reaching restructuring plan.
Real estate issues were depressed by JP Morgan, which said the recent bounce in European sector share prices had been overdone. "We thought the sector looked oversold in March and now the rebound of 44 per cent (UK +55 per cent) since then looks too far, too fast," the broker said. On this basis, its analysts downgraded Liberty International, which fell by 5.8 per cent or 27p to 437.25p, to "underweight" from "neutral" and FTSE 250-listed Segro, which was 7.1 per cent or 1.75p weaker at 22.75p, to "neutral" from "overweight".
On the second tier, weaker oil prices – the cost of a barrel declined below $50 in afternoon trading – disabled Wellstream, the oil services group which fell back to 517.5p, down 13 per cent or 77.5p.
Sector peer Wood Group, which was downgraded to "neutral" from "buy" at Nomura, was also weak, losing 6.6 per cent or 17.2p to 243p.
Elsewhere, Seymour Pierce weighed in on pub companies with a dismal note from analysts. The broker slapped a "sell" rating on Mitchells & Butlers, which was down 6.1 per cent or 17p at 260p, Punch Taverns, which was down 8.4 per cent or 9.25p at 101.5p, and Enterprise Inns, which retreated by 10.2 per cent or 13.2p to 117.25p.
Northern Foods fared better, firming up by 1p to 55.75p, after Citigroup upped its stance to "buy" from "hold", highlighting the sustainability of the company's dividend. The broker was also positive on Dairy Crest, which nonetheless fell back in line with the wider market, retreating by 5.4 per cent or 16.5p to 290.5p.
"We believe that both Diary Crest and Northern Foods will retain their dividends," Citi said, "In contrast, we estimate that Premier Foods [which was 6.3 per cent or 2.25p down at 33.75p at the close] will not pay a dividend, due to financing restrictions, until 2012."