The Footsie closed almost 5 per cent in the red after a bruising session last night, with leading miners falling behind amid growing concern about the outlook for the sector.
Citigroup highlighted the risks ahead in a note to clients, warning that it saw "more negatives than positives", with its models suggestions that weakness in the demand for commodities was likely to persist this year.
"Given the mining industry has been positioning itself for a V-shaped recovery, there could be more downside risk to come," Citi said. "Commodity prices have been the single biggest driving factor for the mining sector, and while we expect the rate of decline to abate, we still see significant downside risk to prices and earnings."
The broker warned that, while it was hard to predict the depth or the severity of the current slump, "historical commodities bear markets have lasted two to three years".
In keeping with its cautious stance, Citi moved Xstrata, down 11.68 per cent, or 91p, at 688p, and Kazakhmys, down 10.27 per cent, or 25.5p, at 222.75p, to "hold" from "buy".
Overall, the FTSE 100 fell to 4,180.64, down 218.51 points. Besides the miners, sellers outnumbered buyers in the banking sector, which was pounded for the second session in a row. The FTSE 250 was down 183.7 points at 6363.59.
HSBC was the main talking point, falling 8.0 per cent, or 51.25p, to 588.75p after Morgan Stanley said that the group needed to cut its dividend and may need as much as $30bn (£20bn) in fresh capital.
"We now expect earnings to fall more sharply in 2009, with no recovery until 2011 at the earliest," the broker warned.
"We believe HSBC is highly likely to cut the dividend in 2009, and in our bear case we now pencil in a £20bn rights issue."
In response, UBS Specialist Sales said that, although a dividend cut and a capital raising was possible, its estimates suggested that only an extra $10bn was needed.
"The other key point is that HSBC can raise this money from their own shareholders and importantly at a premium to book value," it said. "This is more than what most banks can say."
The concerns about HSBC were one among a long list of factors – including fears about the fate of financial stocks after the shorting ban expires at the end of this week and news about further job cuts at Barclays – that depressed sentiment across the sector, with The Royal Bank of Scotland losing 18.4 per cent, or 9.4p, to 41.7p. Barclays was down 14.4 per cent, or 23.8p, at 142.1p.
Worries about a resurgence of short-selling also unsettled insurance issues, with Old Mutual easing to 52.4p, down 11.9 per cent, or 7.1p, and Prudential losing 10.0 per cent, or 37p, to 334p.
The upside was sparse, with a mere four stocks managing to register gains on the FTSE 100, including Amec, which was lifted by a positive trading statement, gaining 6.4 per cent, or 34.5p, to 572p.
On the second tier, Venture Production left everyone in its wake, gaining a spectacular 22.8 per cent, or 102.5p, to 553p on the back of late rumours that Centrica, down 2.2 per cent, or 6p, at 264p, had acquired a stake in the company. The chatter suggested that Centrica had paid as much as 700p per share for its stake, a significant premium to the 488.52p per share price at which Venture entered the closing auction.
Punch Taverns was hounded by sellers, again. The pubs group saw its stock slide to 39.75p, down 31.2 per cent, or 18p, after posting a trading update, warning of continuing challenges in trading.
The business services group Rentokil Initial firmed up by 42.5p, up 3.7 per cent, or 1.5p, after Goldman Sachs moved the stock to "buy" from "neutral". "[The company's] debt issuance in 2008 and the significant decline in LIBOR over the past three months improved balance sheet stability. In addition Rentokil has a range of structural options, above and beyond its stated focus on operation issues that could significantly improve short-term earnings...," Goldman said, raising its target price for RTO to 51p from 39p.
Back on the downside, ITV eased to 35.25p, down 7.8 per cent, or 3p, after UBS reduced its earnings forecasts for the company and moved its target on the stock to 20p from 25p.
The broker also issued a warning regarding a possible financing gap, saying that "even after suspending the dividend and fully drawing down on available bank facilities, we believe that ITV might have to raise new debt by 2011."
Among smaller companies, Blue Oar retreated to 5p, down 16.7 per cent, or 1p, following news that four directors, including the widely followed leisure analyst Mark Brumby, had resigned after the closure of the Evolve offer. Others to go include Andrew Monk, Peter Joy and Gordon Lawson.Reuse content