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Markets fall on eurozone downgrade talk, with Vodafone hit by continental concerns

Market talk that Standard & Poor’s will cut credit ratings hits sentiment, while Morgan Stanley edges down mobile phone group’s target price

After a calm start, markets headed south again as speculation swirled round about Standard & Poor’s downgrading of a number of eurozone members.

Among the biggest fallers was Vodafone, down 2.5% or 4.5p to 175p on concerns about the effect of the current crisis on its European business. Morgan Stanley edged down its price target for the mobile phone company from 215p to 210p and cut its earnings forecasts for next year by 5% to £13.9bn. Analyst Nick Delfas said:

Vodafone has had two excellent years, with 33% sector outperformance. Near term we see potential weakness due to top line in Europe, and we prefer BT. In the medium term, ultimate stabilization in Europe and rising cash from the US still present upside, and the dividend remains secure.

We adjust down our forecasts for likely weaker performance in Italy and Europe more generally. Our preliminary third quarter estimate is for a 1.6% decline in European service revenues, from 1.2% in the second quarter.

There was also talk, denied by the company, that it was guiding analysts to lower their forecasts.

Overall the FTSE 100 finished 25.78 points lower at 5636.64, with nearly 9 points of the day’s fall due to Vodafone.

An initial rise, helped by a reasonable Italian bond auction, was reversed at lunchtime when JP Morgan reported disappointing fourth quarter figures, and the declines gathered pace as traders heard the S&P story. Sentiment was also dented by news that Greek debt restructuring talks had failed to produce agreement and would be halted until next week. But a few bargain hunters at the close meant the index ended off its worst levels. Angus Campbell, Head of Sales, Capital Spreads, said:

There is a chance that we might see a case of “sell the rumour buy the fact” as indices have bounced off their lows, and it’s not as if investors haven’t already been made aware that Europe’s countries could be downgraded. Even the likes of France had been put on credit downgrade watch by a number of the credit ratings agencies, so the sharp sell off might have been a bit of an overreaction.

With Wall Street closed on Monday for Martin Luther King day, US investors were even more keen to close their positions ahead of a long holiday weekend and the US market was down around 100 points by the time London closed.

Despite the eurozone’s financial woes, UK banks managed to avoid the day’s declines. Royal Bank of Scotland rose 1.1p to 24.1p in the wake of Thursday’s restructuring, which included cutting back its investment banking business and axing another 3,500 jobs. Longstanding bear on the bank, Bruce Packard at Seymour Pierce – who has had a sell rating on RBS since March 2010 – issued a buy note with a 40p target price. He said:

We believe that management has finally grasped the nettle, and though not guaranteed to generate rewards for shareholders, we believe there is now greater potential for gains.

Barclays was also better, up 7.75p to 201.2p, while Lloyds Banking Group added 0.35p to 29.5p.

RSA Insurance lost 1.9p to 110p after Citigroup moved from buy to neutral and cut its price target from 145p to 115p.

Mining groups shrugged off a late dip in metal prices following the eurozone rumours, with Vedanta Resources rising 21p to £10.85. Kazakhmys climbed 1p to £10.52 as Societe Generale began coverage with a buy recommendation.

Engineering group Invensys led the mid-cap fallers, down 43.9p to 183.2p after a profit warning. It said it would take a £60m hit following problems at its rail business and delays at three Chinese nuclear contracts.

But Spectris, the testing equipment specialist, soared 72p to £14.82 after an upbeat trading statement. It said it expected full year profits to be around £200m, up from £142m, with strong sales in Asia Pacific. Chris Dyett at Investec said:

Recent profit warnings from competitors leads us to be cautious short term, but we like this stock longer term and retain our target price [of £16.50], based on international peer multiples, and our buy recommendation.

Elsewhere Imagination Technologies lost 22.5p to 538p after Berenberg Bank downgraded the chip designer from buy to hold. Larger rival Arm – which has this week seen Intel make moves into its smartphone territory – dropped 9.5p to 575p.

Finally Falklands Oil and Gas fell 5.5p to 45p after raising £48.5m with a placing at 43p a share. The proceeds will be used to fund the drilling of new wells off the South Atlantic islands, an area where a number of companies are currently searching for oil. Analysts at Westhouse issued a buy note, saying:

[The company] has made a good decision to raise additional funding, in order to allow maximum flexibility for siting its next two wells based on the evolving geological understanding of its prospects rather than financial constraints.

However, our target price will remain at a heavily discounted 203p, to reflect the reluctance in the market to value exploration in the sector, particularly in regions such as the Falklands where potential development faces additional political challenges. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds