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U.K. Stocks Retreat Amid Reports of S&P Downgrades in Euro Area

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Jan. 13 (Bloomberg) -- U.K. Stocks retreated, erasing an earlier advance, amid reports several euro-region countries may face imminent credit downgrades by Standard & Poor’s.

Vodafone Group Plc dropped 2.5 percent after Morgan Stanley warned of “potential weakness” in a note to clients. Invensys Plc sank 19 percent after saying annual earnings will be “significantly” below last year. International Power Plc retreated 2.2 percent.

The benchmark FTSE 100 Index dropped 25.78, or 0.5 percent, to 5,636.64 at the close in London. The gauge earlier rallied as much as 0.8 percent. The broader FTSE All-Share Index slid 0.4 percent, while Ireland’s ISEQ Index gained 0.1 percent.

“The bulls were blown out of the water today as it gradually became more apparent that rumors of credit ratings downgrades to a number of European countries were true,” said Angus Campbell, head of sales at Capital Spreads in London. “The downgrades are expected after European markets have closed which is why so many people rushed for the exit.”

Stocks erased gains after Dow Jones Newswire reported several euro-region countries face downgrades by S&P with France included on the list. The news agency cited unidentified European Union sources.

Germany will keep its AAA rating at S&P as France and Austria face downgrades, according to government officials and people familiar with the matter told Bloomberg News.

France will lose its top rating for the first time, said Agence France-Presse, citing an unidentified government official. Austria will be downgraded, a person familiar with the situation said. The European official said the announcement may come at 9 p.m. Brussels time.

Vodafone, the third-biggest weighted stock in the FTSE 100, dropped 2.5 percent to 175 pence, a three-week low.

“We see potential weakness due to top line in Europe,” Morgan Stanley analysts wrote in a report, saying they prefer rival BT Group Plc. BT shares climbed 1.9 percent to 203.4 pence.

Invensys tumbled 19 percent to 183.2 pence, the steepest drop since 2003, after the maker of washing-machine controls and factory gear revealed 60 million pounds ($92 million) in additional costs to fulfill contracts.

Earnings will be “significantly” below last year amid cost overruns in rail-signal orders and extra engineering for controls for eight nuclear reactors in China, the company said.

International Power dropped 2.2 percent to 334.5 pence after JPMorgan Chase & Co. analyst Ian Mitchell advised clients he had turned a “strong short-term seller” of the shares following cuts to earnings estimates. We “could see 10 percent downside from here,” he wrote in the note.

Fresnillo Falls

Fresnillo Plc, the world’s largest primary silver miner, was the worst performer on the FTSE 100, falling 2.7 percent to 1,687 pence as the precious metal retreated for the first time in five days. Randgold Resources Ltd. slipped 1.7 percent to 7,115 pence as gold declined.

Elsewhere, Hays Plc rose 5.1 percent to 64.7 pence after Credit Suisse Group AG raised its recommendation for the recruitment company to “outperform” from “neutral.”

Balfour Beatty Plc gained 1.3 percent to 281.7 pence after the company was named the principal contractor by Axa Real Estate for the construction of Sixty London.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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