FTSE falls nearly 2% on Spanish fears but brokers tip out-of-favour Morrisons and Home Retail

Investors fight shy of risk after four days of market gains, as Spanish problems escalate

As leading shares fell sharply on renewed fears for the eurozone amid rising Spanish and Italian bond yields, a couple of out of favour retailers managed to escape the worst of the downturn.

Morrisons, under pressure recently on concerns about its falling market share, ended 1.7p higher at 275p after positive comments from Galvan Research. Analyst Andrew Gibson said:

Despite difficult conditions, Morrison’s May update was in line with its expectations, and this coupled with the ongoing share buyback and the woes of sector leader Tesco suggests that the shares represent a buying opportunity just off the current year lows.

Meanwhile Home Retail, owner of Argos and Homebase, fell 0.8p to 76.6p , outperforming the market following an overweight recommendation from JP Morgan:

It’s been a difficult three months. Expectations are low generally and have worsened in the recent poor weather. However, it is still all to play for at Christmas for Argos where capacity exits should benefit and Homebase could have a decent Jubilee-boosted second quarter. The new Argos boss is due to report his views in October. All options are on the table. The market, we think, will be hoping for an accelerated store closure programme, even if it does cost £125m. The risk is he does nothing. The shares look inexpensive on 2014 PE of 7.5 times, in our view, but the sensitivity of the estimates is high, as is the risk/reward.

Overall, after four days of gains, the FTSE 100 finished 93.86 lower at 5297.28. Growing fears about Spain’s banks and pressure on Italy were not eased by the European Commission’s proposals for closer banking ties, despite an initial burst of optimism. The euro hit new 22 month lows, and European markets also plunged into the red. Disappointing US pending house sales did not help sentiment, ahead of Friday’s non-farm payroll numbers. Angus Campbell, head of market analysis at Capital Spreads, said:

The market was hit from all angles today as the latest poll from Greece gave the anti-bailout party the biggest share of the vote, the Italian bond auction was a disappointment and EU economic and industrial confidence data fell sharply in May, much more than expected. All this news flow gave bears the perfect opportunity to push the market lower in a perfect storm of panic which is fanning the problems by causing Spain’s borrowing costs to go higher.

Mining groups and banks were – as usual – among the main fallers as investors shied away from risk once more. Eurasian Natural Resources Corporation closed 30.6p lower at 434.6p and Vedanta Resources lost 53.5p to 940.5p. Among the financials, Barclays fell 1.55p to 179.45p and Royal Bank of Scotland ended 0.62p lower at 20p as it fending off questions about executive pay at its annual meeting.

Elsewhere BG agreed to sell its 40% stake in two gas-fired power stations in the Philippines for $360m, freeing up cash to invest elsewhere. Its shares lost 59.5p to £12.24 in the general gloom, but Andrew Whittock at Liberum Capital issued a buy note:

We had valued the interest at $300m – so it confirms our 1570p BG asset valuation but no significant change to forecasts.

A number of companies saw their shares go ex-dividend, including Amec, 40p lower at 975p, and Marks & Spencer, down 12.8p at 332.2p.

Utility companies provided some comfort. Severn Trent rose 42p to £17.06 after better than expected full year profits and news of a proposed £150m return to shareholders.

Chip designer Arm added 1p to 508.5p after Dell said it would offer customers a choice between the company’s products and those of rival Intel. Positive comments from Apple – an Arm customer – also helped, as did analysts at UBS suggesting potential cash payouts to investors.

Among the mid-caps Essar Energy rose 25.5p to 141.8p on reports the Indian government had approved its development plans for a coal block in Madhya Pradesh state. The company said it had yet to received any official notification.

Industrial group Cape, which shocked investors a week ago with a profit warning after running into trouble with its projects in Algeria, climbed 7.5p to 238p after appointing a new chief executive. Joe Oatley, former chief executive of engineering group Hamworthy, will join in June.

Centamin, the Egypt-focused mining group, added 2.5p to 64.25p after a new five year plan for its Sukari gold project. It expects to double last year’s production by 2014

Finally Booker jumped 7.9p to 87p after the cash and carry group paid £139.7m for the UK businesses of Germany’s Metro, which trades under the Makro name. The deal involves Booker paying £15.8m in cash and the rest in shares, which would give Metro a 10% stake in the company.

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