FTSE falls on euro threat, retail woes

Thu Nov 17, 2011 7:08am EST

* FTSE down 1.5 percent

* Bank retreat as Europe bond yields rise

* Retailers hit by Mothercare, French Connection updates

* Rexam rises on in line update

By David Brett

LONDON, Nov 17 (Reuters) - Britain's top share index was sharply lower on Thursday, with banks heavy fallers as worries over the euro zone debt crisis intensified and retailers were hit by more disappointing updates from the high street.

UK banks fell after an auction in which Spain paid the highest rate to sell its 10-year debt since 1997, as the country is swept deeper into the euro zone's debt crisis ahead of a Parliamentary election on Sunday.

French bond yields also rose after its own bond auction, while Italian bond yields remained dangerously high as investors feared Europe's debt crisis could spell the end of the euro.

"If the gathering collapse in European bond markets is not arrested, then the economic damage will be greater than equities are discounting," said Andrew Bell, chief executive of the 1.1 billion pound Witan Investment Trust.

Earlier in the session, ratings agency Fitch cast a shadow over the banking sector after it voiced concern over U.S. banks' European exposure.

"Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken. The risks of a negative shock are rising," Fitch said.

London's blue-chip index was down 83.79 points, or 1.5 percent, at 5,425.23 at 1138 GMT.

The FTSE volatility index rose 8 percent and is up around 12 percent in November as Europe's politicians have failed to contain the debt crisis.

Adding more pressure to the UK's benchmark index, Wall Street futures pointed to a weaker open for U.S. equities.

Miners and integrated oils fell as the demand outlook remained opaque at best and as investors ditched riskier equities, with traders saying technically there was scope for further downside.

"The UK FTSE 350 Mining sector index is testing below its own 200-week moving average line by around 1 percent," said Darren Sinden, a trader at Silverwind Securities.

"A move back to the mid-October lows around 18,700 is possible through here, a correction of some 8 percent from the current levels of 20,360."

RETAIL WOE

European debt worries and austerity packages being implemented by governments around the world continue to weigh on consumers and feed through to retailers' bottom lines.

FTSE 250 mother and baby products retailer Mothercare fell 2.5 percent as the firm reported first-half pretax losses.

Small-cap fashion retailer French Connection shed 20 percent after issuing a profit warning.

That followed Game Group's profit warning on Wednesday, as the video game retailer became the first to voice concerns over trading in the build-up to the vital Christmas period.

Blue-chip retailers such as Marks & Spencer, Kingfisher and Next fell up to 1.7 percent.

Mixed retail data failed to lift sentiment in the sector.

Tough trading conditions in Europe saw brewer SABMiller's earnings fall short of expectations, pulling its shares down 1.7 percent.

On the upside, Europe's largest drinks can maker Rexam rose 2.4 percent following its update, with Oriel Securities maintaining its "add" rating on valuation grounds.

Oriel says in rating terms Rexam on 9 times is at a near 20 percent price to earnings discount to its key peers Ball and Crown.

National Grid, Britain's biggest energy distributor, added 1.1 percent after reporting a rise in first-half pretax profit and saying it was on track to deliver strong full-year results.

Commodities group Glencore International climbed 1 percent after saying third-quarter trading in its marketing arm was "solid", as it posted a jump in metals output and announced its first oil production, ahead of schedule.

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