Weakness across the mining sector undermined the blue chip FTSE 100 index last night, with Vedanta Resources taking the wooden spoon as nervous traders eyed the darkening economic outlook – and the threat it poses to the world's appetite for commodities.
Vedanta was nearly 7 per cent or 75p lower at 1,014p, falling with peers such as Antofagasta, down 6.1 per cent or 71p at 1,103p, and the Eurasian Natural Resources Corporation, down 40p at 646p, as fresh fears about Europe weakened the commodities market.
The connection is the impact on global growth: traders worry that if politicians fail to solve the sovereign debt storm, the already fragile global economic recovery will fizzle out. That would mean less manufacturing and industrial activity, and therefore lower demand for key commodities such as copper.
There is also the risk demand will fall as debt-laden countries push through austerity measures to placate angry markets. Mining equities came under pressure as commodity prices dropped in response to these concerns, with the FTSE 350 mining index shedding more than 3 per cent of its value yesterday. And looking ahead, analysts said further falls could be possible as the crisis rages on.
"The eurozone sovereign debt crisis continues to make life difficult for those who trade base metals," Citigroup's David Thurtell said in a circular to clients. "The impact of some improvement in the underlying supply-demand fundamentals for individual metals have been overwhelmed by the debt/budgetary problems of Greece and Italy (and thus the potential for a deterioration in demand)."
Overall, stock markets endured a volatile session, with all eyes fixed on rising bond yields across Europe. Both Spain and France had to paid higher interest rates to borrow money yesterday, and although Paris paid less than Madrid, the fact that French yields crept up at all was enough to rattle traders and reignite fears of contagion. "What investors need now is something that will free them of the uncertainty that's riddling the markets with fear," Angus Campbell, head of sales at the City spread-betting firm Capital Spreads, said.
"Whether that's in the form of central bank intervention with some serious firepower behind it or an agreement on how to increase the size of the EFSF [the European Financial Stability Facility] doesn't necessarily matter, but some action to kick-start growth again and restore confidence is desperately required."
With no reassurance forthcoming so far, and with the mining sector drilling into the red, the FTSE 100 promptly fell by 1.6 per cent or 85.88 points to 5,423.14. The FTSE 250 was similarly unsettled, ending the session at 10,150.28, down 125.28 points last night. The weakness was such that only a handful of blue chips managed to record meaningful gains. The Swiss commodities trader Glencore, up 7.8p at 412.9p, was one of the risers, bucking the broader sector trend, after reassuring investors with its third-quarter update.
Given the concerns about Europe, the financial sector was unsurprisingly glum, with Lloyds and its part-nationalised peer Royal Bank of Scotland falling by around 4.6 per cent or 1.235p to 25.7p and by nearly 3 per cent, or 0.6p, to 20.5p respectively. Barclays was around 2.5 per cent, or 4.45p, weaker at 168.05p. Not a single bank managed to close in the black as investors lost their appetite for risk.
Elsewhere, a number of retailers featured on the FTSE 250 loser board despite the release of some positive retail sales figures from the Office for National Statistics. The retreat came as the official report – which showed that retail sales were up 0.6 per cent in October, defying forecasts of a fall – was overshadowed by some negative company updates.
Mothercare, for example, told investors it had fallen to a half-yearly loss as weakness in its UK arm offset strong overseas growth. News that the company had also cut its dividend helped send its shares lower by almost 18 per cent or 27.7p to 127.3p.
Joining it at the lower end of the mid-cap index were the likes of the Supergroup retailer Superdry, down around 5 per cent or 32p at 591p, and Dixons Retail, which was 0.62p behind at 10.47p.
Kesa Electricals was also held back, falling by 4.5 per cent or 4.05p to 85.95p as JP Morgan Cazenove weighed in. The investment bank argued that the benefit from the recent agreement to sell the Comet chain was more than offset by the deterioration in the outlook for the French electricals market, the home of Kesa's Darty business.
"The outlook for the French electricals market has substantially deteriorated with weakness in both the top line and gross margin," the broker said, sticking with its "underweight" stance and lowering its target for Kesa's shares to 75p from 84p.