Market Report: ARM stumbles following warning over order book

Arm Holdings was among the laggards last night as the FTSE 100, rattled by fears of an escalation in the European debt crisis and by signs of growing tensions between North and South Korea, moved closer to booking one of its worst monthly performances on record.

The chip maker was marked down by nearly 6 per cent or 13.8p to 228.4p amid worries that the pace of semiconductor orders may slow over the second half of the year. The sector has seen a pick-up in orders as the recession ended, demand improved and customers rushed to rebuild stockpiles after letting them wane during the downturn. But JP Morgan Cazenove warned that, with restocking mostly over now, the momentum may fade as a variety of headwinds come together in the months ahead. For starters, weakness in the euro could dampen the appetite for electronics priced in US dollars, while the implementation of government austerity measures could hamper demand more generally.

At the same time, the sector faces the prospect of a slowdown in Chinese demand as the government there tries to cool the economy, and the possibility of a slowdown in orders from the solar sector as Germany cuts subsidies later this year. Other factors such as the possibility of a post-football World Cup inventory overhang in the TV market could also weigh on the pace of orders, the broker said, switching its stance on ARM to "underweight" on valuation grounds.

Overall, not a single blue-chip managed to book gains and the FTSE 100 closed below the 5,000 mark for the first time since October last year, shedding 2.5 per cent or 128.93 points to 4,940.68 as sovereign debt dominated the agenda. The benchmark is now at its lowest level since early September last year, and is down nearly 11 per cent since the beginning of this month. At current levels, this month is set to go down as the FTSE 100's fourth worst on record, while a fall of another two and a half percentage points or so by Friday will mark the worst monthly run since Black Monday caused a 26 per cent slump in October 1987.

Besides the European debt crisis, geopolitical tensions across the Korean peninsula also knocked the mood, as did early losses on Wall Street. The Dow Jones Industrial fell below 10,000 as trading commenced, with US investors taking their cues from declines across Europe and Asia. The banking sector took a hit as interbank lending rates jumped, prompting fears of a rerun of the sort of liquidity crisis that undermined leading financials during the credit crisis.

The sell-off wiped nearly 9 per cent or 4.95p off Lloyds Banking Group, which closed at 50.5p – its lowest level since early March. Barclays was nearly 6 per cent or 17.05p weaker at 283.8p, while Royal Bank of Scotland fell to 42.7p, down 2.67p. Standard Chartered and HSBC were down 54.5p at 1,578.5p and down 11.2p at 619.5p respectively.

The sell-off also undermined Aviva, which lost 4.2 per cent or 12.9p to 294.2p despite Panmure Gordon, whose sales team met with the insurer's chief executive earlier this week, urging investors to "buy". "It was reassuring to hear that Aviva remains focused and on track," the broker said, keeping its target price unchanged at 496p. "We think that Aviva has been overlooked in all the excitement over Prudential and looks oversold."

Over in the mining sector, worries about an escalation in the debt crisis, and its potential impact on the world's demand for commodities, undermined sentiment. The Eurasian Natural Resources Corporation was the worst off, sliding by more than 7 per cent or 69.5p to 905.5p, while Vedanta Resources lost 118p to 2,079p and Antofagasta fell to 819.5p, down 46p.

Weaker oil prices weighed on Royal Dutch Shell, which was 22p lower at 1,766.5p, and BP, which lost 7.8p to 485.2p. The latter, which continued to attract attention owing to the Gulf of Mexico oil spill, was also the subject of a new UBS circular, with the broker reiterating its "buy" view but scaling back its target price to 630p from 725p previously. In the exploration and production sector, Tullow Oil was 30p down at 1,008p.

Further afield, the FTSE 250 was 3 per cent or 288.22 points lower at 9,189.35p. The oil services specialist Wood Group was among the weakest, losing 26.4p to 311.9p, partly owing to weaker oil prices, and partly because of some cautious commentary from Bank of America Merrill Lynch. "Despite continuing to like the fundamentals, we see limited newsflow near-term for Wood Group and hope there are no further delays to projects being sanctioned as [the] order intake in [the engineering business] has been weak," the broker said, switching its view to "neutral" while highlighting the recent run of strength in the shares.

The power station operator Drax was also behind, with the market sell-off driving it to 326.3p, down 3.6p, despite Barclays Capital revising its stance to "equal weight" on valuation grounds. "As a result of the share price decline over the past two months, we now consider the shares close to the intrinsic value of Drax's assets," the broker said. "Given this asset anchor value, we do not believe the share price can fall significantly further."