US jobless figures send FTSE 100 sharply lower

Miners and oil companies led the market lower as fears of a prolonged recession grew in the wake of grimmer than expected US jobless figures.

The price of precious and base metals, not to mention oil, had been weak all day but dropped further after news that 533,000 Americans had lost their jobs in November - far worse than the most pessimistic forecasts.

So Lonmin - which is tipped to lose its place in the FTSE 100 at next week's index changes - dropped 107p to 552p while BHP Billiton fell 84.5p to 975.5p and Kazakhmys closed 16p lower at 215p. Meanwhile Xstrata, which has been hit by concerns about its borrowing levels, dropped 54.5p to 575p. But analyst Michael Rawlinson at Liberum Capital said he believed these debt fears had gone too far. He said:

"Following the acquisition of its 25% stake in Lonmin, we estimate Xstrata's gross debt at $17.3bn. Xstrata's debt covenants are tested by its lenders every 6 months (end of June and December). On our provisional numbers at current spot prices we forecast that Xstrata will be in compliance with its banking covenants until its next major refinancing in June 2011.

"We believe that market concerns over covenant defaults are overdone. Mick Davis [Xstrata chief executive] is holding an analyst lunch in London on Monday where we expect clarity on a number of key investor concerns. In our view, to mark Xstrata as a sell on fears over debt default can only be the case if investors believe that 2010 will be worse than now until the end of 2009."

With US crude falling below $42 a barrel, Tullow Oil lost 51p to 443.5p and oil services company John Wood Group - which is also likely to drop out of the FTSE 100 next week - slid 21.3p to 163.8p. BP closed 33.75p lower at 478p and Royal Dutch Shell B shares dropped 99p to £15.15.

The poor jobs news pushed Wall Street down more than 200 points in early trading, and helped accelerate the FTSE 100's decline during the afternoon. By the close the leading index had fallen 114.24 points to 4049.37.

Elsewhere, the directors of transport group Stagecoach kept investing more money to raise their stakes, and the company's shares kept falling. Stagecoach - yet another company whose place in the leading index is under threat - closed down 13.8p at 119.3p. The fall came despite chief executive Brian Souter spending another £1.9m to increase his stake to just over 15%, his sister and the company's co-founder Ann Gloag paying £2.9m for 2.2m shares, her husband David McCleary buying £27,780 worth, and company secretary Ross Paterson splashing out nearly £17,000.

There were some bright spots. Insurer Friends Provident has been buoyed recently by talk that rival Resolution, which is planning to buy up insurance assets once it has completed its flotation, could be interested in the company. Today it rose another 1.2p to 73.5p after Deutsche Bank - although playing down a Resolution bid for Friends - nevertheless moved its recommendation from hold to buy and raised its price target from 77p to 95p. Analyst Oliver Steel said:

"Friends is a rarity in the insurance sector: a cheap defensive. Its balance sheet is comfortable and is relatively unaffected by market moves, yet the shares trade at just 55% of embedded value. Although we do not expect Friends itself to be bid for, the IPO of Resolution and its plans to play a consolidating role in the life assurance and asset management arenas [with potential firepower of £3bn to £5bn] should trigger a re-rating in Friends' shares. Longer term there is also the potential for well-respected new management to deliver value."

Software group Misys moved 7.5p higher to 92.25p as UBS upgraded from neutral to buy. It said:

"A late-December trading update may have some blemishes but, in our view, not enough to justify today's valuation of the group."

But computer game retailer Game Group fell 9.75p to 130p on talk that US rival GameStop was interested in buying half of the 815 stores owned by the collapsed Woolworths group. Later GameStop - which some analysts believe might be interested in bidding for Game - denied it had made a bid for the Woolies outlets.

IQE, the technology company which supplies gallium arsenide wafers used in computer chips, closed down more than 9% at 6.125p as Panmure Gordon cut its rating on the company's shares from buy to hold. The broker said:

"New industry research from Gartner and further warnings from Nokia and RFMD suggest that the mobile handset market continues to weaken, and that our expectations for smartphone growth are too optimistic. This impacts on our IQE forecasts for 2009 where we expected growth in smartphones to partly offset a weaker overall market. Our revised dollar revenue forecasts result in a 43% cut to full year 2009 earnings per share. We reduce our price target from 17p to 10p and our recommendation to hold."