Market Report: FTSE 100 touches lowest level since November

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The London market endured a rocky session as a round of short-covering and bargain-hunting rescued the FTSE 100 from a seven-month low last night.

The day began with gains but the benchmark soon gave way as the bears built on Thursday's sell-off. The index swiftly veered below the 5,000 point mark for the first time since November last year, dropping as low as 4957 as traders sold out on persistent concern about the European debt crisis and fears of ever more intrusive regulatory moves.

The dip in the market's appetite for risk was evident in movements in the bond markets, where yields on 10-year gilts, which tend to drop on signs of risk, neared their lowest levels in eight months. "Sovereign risk has polluted the government bond market, the corporate debt market, the equity market and, finally, the currency markets," Philip Isherwood, an equity strategist at Evolution Securities, said as equities plumbed new depths.

Early losses on Wall Street only served to hasten the slide, with the Dow Jones Industrial Average slipping below the 10,000 level as trading commenced. It was at this point that traders, sensing that the sell-off may have been overdone, began to wade back into the market and short sellers moved to abandoned their bets, helping the FTSE 100 to recover to 5,062.93, still down 10.2 points, but well off the day's lows. The FTSE 250 behaved in a similar fashion, touching a low of 9,293.68 before recovering to 9,446.94, up 13.35 points at the end of business.

Despite the late turnaround, the benchmark is down nearly 9 per cent since the beginning of May, putting it on track for one of its worst monthly falls on record. A decline of more than 10.7 per cent will put this month ahead of October 2008, when, rattled by the collapse of Lehman Brothers, the FTSE 100 endured its worst monthly performance since the bursting of the bubble in 2002. The weakest month was October 1987, when the Black Monday crash depressed the index by over 26 per cent.

Xstrata, up 6.4 per cent or 56.8p at 950p, and Rio Tinto, up 97p at 2,909p, were among the best-performing blue chips of the day, booking gains as investors bought on the view that the impact of Australia's mining tax may not be as bad as feared. Canberra's proposal for a hefty tax on mining profits has sullied the mood across the mining sector, with leading stocks underperforming as traders priced in the potential hit to earnings. But HSBC said the sell-off may have been overdone as political pressure was likely to spark a partial retreat on the part of the government, which faces an election later this year.

"Although not a massive political risk (no Australian government has lost an election after one term), the recent decline in the polls and the potential link between mining and marginal electorates should mean that the government will now want to reduce the controversy surrounding the new tax," the broker said, repeating its "overweight" view on Rio, which is seen as among the most exposed to the proposed levy. The assessment met with a ready audience among bargain hunters, who, emboldened by short covering and firmness across parts of the commodity markets, soon moved in. "The poor relative performance of Xstrata looks overdone in comparison to the potential impact of the tax," HSBC added, adopting a "neutral" view on the stock.

The late turnaround on the FTSE 100 helped the banks to pare earlier losses, with Lloyds Banking Group bouncing off a low of around 52p to close at 55.8p, up 0.9p. Royal Bank of Scotland went from a low of 42.37p to 45.25p, up 0.43p, at the end of the day, while Barclays was nearly 4 per cent or 10.9p higher at 298.9p. Earlier, Barclays had fallen as low as 280.1p, down nearly 3 per cent.

National Grid, which fell sharply after surprising the market with plans for a rights issue alongside its results earlier this week, continued to trade lower, shedding 13p to 563.5p as Goldman Sachs reiterated its "conviction sell" stance. The analysts at Macquarie were more positive, and repeated their "outperform" view. Of the other utilities, Centrica, the company behind British Gas, slipped by 3.9p to 272.6p, while United Utilities gained 3.5p at 530p as the market mounted a comeback in final hours of trading.

Elsewhere, oil prices fell below $70 a barrel at one point as investors sold on fears that the European debt crisis and the wave of austerity measures being introduced across the continent could bear down on growth. The weakness undermined Royal Dutch Shell, which fell by 20.5p to 1815.5p despite Barclays Capital upgrading its stance to "overweight". BP lost 22.1p to 506.7p as traders watched for news from the Gulf of Mexico oil spill.

Further afield, parts of the housing sector lost ground after Bank of England figures showed that mortgage approvals for house purchases by the country's six biggest lenders fell from 51,000 in March from 47,000 in April, raising questions about the recovery. The sector switched course as the wider market mounted a recovery near the close, with Barratt Developments, for instance, going from a session low of 103.1p, down 2.5p, to 107.3p, up 1.7p, at the end of the day.

FTSE Risers

Eurasian Natural Resources Corporation 972p (up 37.5p, 4 per cent):

Miners boosted by firmer commodity markets, bargain-hunting.

Icap 369.2p (up 9.7p, 2.7 per cent):

Credit Suisse maintains "outperform" stance, raises target price to 485p from 430p.

British Airways 188.5p (up 2p, 1.1 per cent):

Gains ground after posting a smaller than expected pre-tax loss for the full year.

FTSE 100 Fallers

London Stock Exchange 643.5p (down 6.5p, 1 per cent):

Posts full-year results; adjusted basic earnings per share fall to 60.1p.

British Land 437.8p (down 7.2p, 1.6 per cent):

Falls back amid a round of profit-taking as traders move to bank recent gains.

Alliance Trust 317.5p (down 2.8p, 0.9 per cent):

S&P Equity Research downgrades target price to 352p from 382p.

FTSE 250 Risers

Trinity Mirror 110.4p (up 15.9p, 16.8 per cent):

Secures pole position on the FTSE 250 as market slide lures bargain hunters.

Logica 123.3p (up 4.3p, 3.6 per cent):

Rumours of bid interest from India's Infosys; upped to "buy" from "hold" at S&P Equity Research.

Booker 40.43p (up 0.08p, 0.2 per cent):

UBS revises stance to "buy" from "neutral", raises target price to 47p from 46p.

FTSE 250 Fallers

Yell 35.3p (down 1.75p, 4.7 per cent):

Under pressure amid profit-taking after rallying by nearly 10 per cent on Thursday.

Rightmove 620.5p (down 5.5p, 0.9 per cent):

Housing-related stocks in focus as Bank of England mortgage approval data disappoints.

Daily Mail & General Trust 313.6p (down 10.7p, 3.3 per cent):

Declines as traders move to secure profits from recent gains.