Rate cut rumours bring down banks

The London market fell perilously close to the all-important 4,000 level, dragged down by disappointing results from GlaxoSmithKline and a drubbing for financial stocks.

The FTSE 100 index ended down 112 points at 4006.9, its lowest level of the day, as investors fought a rearguard action to ensure that the big number did not change.

Glaxo sent the market into a tailspin with figures at the low end of expectations and a warning of a slowdown in growth next year. Its shares ended the day down 81p at 1249p.

The blue chip index was already in negative territory before Glaxo's intervention.

An early spurt to 4166.6 was readily conceded as the Footsie was led into negative territory by financial stocks, especially the banks.

Intriguingly, it was the prospect of lower interest rates which triggered the decline. The monetary policy committee minutes indicating that three members wanted a cut in rates had traders fretting about the underlying health of the domestic economy.

An interest rate cut was not viewed as being good for stocks. Instead, it was taken as a bear signal for the broader economic outlook. That is unhelpful for the banks. A declining economy puts pressure on the corporate sector which in turn puts pressure on banking loan books.

Leading the decline was Royal Bank of Scotland which fell 100p to 1464p.

Its fall was exaggerated by news of a $7.25bn filing in the US, giving it the option to issue debt and equity at some point in the future.

Royal Bank explained the regulatory filing as part of its ongoing capital raising operations but some traders were unconvinced and saw either eroding capital or a looming acquisition. Earlier the stock had been downgraded by WestLB Panmure to neutral from buy.

HBOS received a similar downgrading from the same house and fell 34.5p to 695p. Barclays was down 34.75p to 435.75p and Bradford & Bingley dropped 9.25p to 310.75p. Alliance & Leicester had its rating cut to under perform from neutral and the shares shed 11.5p to close at 875p.

Lloyds TSB saw its shares tumble 34.5p to 559.5p, while Abbey National fell 15.5p to 614p in sympathy. Standard Chartered gave up some of yesterday's gains to close 13p down at 749p while HSBC ended the day 8p down at 715.5p.

It was a thoroughly depressing day for the banks which collectively accounted for a fall in the index of about 40 points.

They were not alone in their misery. Insurers also took a battering after an uncomfortable report from Standard & Poor's. The ratings agency said volatility and uncertainty in global equity markets had caused the financial strength of the UK life insurance market to fall by its largest margin in more than five years. It has been the worst year ever in terms of credit downgrades.

Standard & Poor's raised the prospect of further downgrades but said it considers that the capital positions of securely rated life companies, those with a triple B minus or above, remains strong.

Despite having such a rating, Prudential saw its price fall 26p to 435.5p and Aviva tumbled 44p to 455p.

Legal & General, which also boasts a secure rating, was unchanged at 107.75p. The insurer was helped by news that its £786m rights issue had been taken up by 95% of shareholders.

Royal & Sun Alliance, which has shed its life division to focus on general business, could not escape the broader decline and ended the day as the Footsie's worst performer closing down 12.25p at 103.25p.

Once again the oil companies gave up ground in response to the weaker outlook for oil prices with BP off 6.5p at 421.5p and Shell down 9.25p at 401.75p.

St Ives, the printing group, which warned only a week ago that it saw no sign of an upturn, was friendless. The shares fell 12p to 313.5p on renewed chatter about how weaker advertising revenues will defer any recovery.

Aberdeen Asset Management saw a further depressing decline in its share price. All week the stock has been on the slide and it ended the day down another 9.5p at 31.5p as it was faced with the threat that one of its clients might remove its funds from Aberdeen's management.

On a day when it was difficult to find too many advancing share prices some cheeky eyes alighted upon British Land, up 12.5p at 464p, and Liberty International, ahead 17p at 591p.

The upward progress of both shares gave rise to idle gossip that the two companies, which failed to merge two years ago, could be about to try again.