King’s warning weighs on the City

A BLEAK warning from Bank of England governor Sir Mervyn King, eurozone debt uncertainty and worse-than-expected US unemployment data yesterday brought the London market’s rally to a screeching halt.

The FTSE 100 index closed 16.08 points or 0.3 per cent lower at 5,489.34 having spent much of the session in the black as traders continued to bask in Wednesday’s coordinated action by central banks to ease the inter-bank credit crisis.

But the mood soon dampened when King, in his role as chairman of the interim financial policy committee (FPC), warned of the severity of the eurozone crisis and urged banks to boost capital levels to protect against future financial crises.

The US labour department revealed weekly jobless claims spiked above 400,000 for the first time in several weeks, fuelling concerns over the health of the world’s largest economy.

The pound was hit by the FPC’s gloomy assessment and fell against the dollar to $1.56 and the euro at €1.16.

Chris Beauchamp, a sales trader at IG Index, said: “With investors caught between the excitement of Wednesday’s coordinated central bank move and Friday’s non-farm payroll figures, caution was the prevailing sentiment of the day.”

The FPC revealed UK banks’ exposure to government debts of the so-called “vulnerable five” – Greece, Ireland, Italy, Portugal and Spain – was £14.8 billion, hitting the banking sector, with Lloyds off 0.8p at 24p and Barclays fell 3.1p to 177.2p, while Royal Bank of Scotland was down 0.4p at 20.6p.

Sentiment was also affected by a survey showing the first fall in activity in the Chinese manufacturing sector for three years. There were also warnings that the UK manufacturing sector faces a bleak winter after the Chartered Institute of Purchasing & Supply purchasing managers’ index for November showed a further decline.

B&Q-owner Kingfisher was among the top risers after it reported better-than-expected third-quarter profits of £273 million, an increase of nearly 14 per cent. Shares bounced up 2 per cent or 5.7p to 261.3p.

Shares in pub chain Greene King were down 3 per cent despite it reporting a 5.6 per cent rise in half-year profits to £73.1m. The stock was 17p lower at 465.7p.

Also in the red was support services firm Carillion after it told 4,500 staff in its energy services division that their jobs are at risk following UK government plans to halve subsidies on solar power. Shares were down 4 per cent or 13.1p at 297.4p. Among the Scottish stocks, Dundee-based cash machine software firm I-design notched up a 5 per cent rise, 3p higher at 62.5p, after unveiling its maiden profit a year ahead of schedule.

Xcite, the Aberdeen-based oil producer, was the third-biggest faller on the FTSE all-share index – down 21 per cent or 23.5p to 88.5p after being forced by the UK government to change its plans for developing the Bentley field in the North Sea.

Helius Energy – which is building a power plant in Moray that will turn waste from distilleries into heat and electricity – rose 8 per cent or 0.88p to 11.88p, a day after shipping group scion Alastair Salvesen joined its board as a non-executive director.