Fuller Smith & Turner Share News (FSTA)

LONDON (Alliance News) - UK stocks ended sharply lower Thursday, as volatility in debt markets weighed on investor risk appetite alongside the continuing Greek debt talks, and concerns about China also weighed on London's listed mining stocks.

The FTSE 100 closed down 1.3% at 6,859.24, although it recovered somewhat from a low of 6,838.95 points, a level it hasn't seen in a month. Meanwhile, the FTSE 250 ended down 1.0% at 18,090.42, while the AIM All-Share ended down 0.1% at 777.33.

Europe's major indices also ended lower, with the CAC 40 in Paris down 0.9% and the DAX 30 in Frankfurt down 0.7%.

When the European markets closed, the DJIA was down 0.5%, the S&P 500 down 0.4% and the Nasdaq Composite down 0.3%.

Further gyrations in debt markets, generally known for a lack of volatility, sent equity markets lower. European Central Bank President Mario Draghi had warned markets on Wednesday that they'd have to "get used" to periods of volatility while interest rates remain at record lows.

Markus Allenspach, analyst at Julius Baer, said that "while Draghi strictly rejected all questions about an early termination of the purchase programme given the rebound of reported and expected inflation, it is fair to say that he has failed to stem against rising bond yields".

"In fact, Draghi explicitly shared our view that bond yields will remain volatile, thus implicitly tolerating a further increase," wrote Allenspach.

Andre Severino, head of global fixed income at Nikko Asset Management, does not expect the recent steepening of the bund yield curve to be the beginning of a sustained new trend. "Moreover, Eurozone and German economic data, albeit improving, are not sufficient to support the higher bund yields on a sustained basis," he said.

The Bank of England kept its key interest rate steady at a record low of 0.5% and the size of asset purchases at GBP375 billion at the end of its two-day rate setting meeting. In the quarterly Inflation Report released in May, the bank suggested that the interest rate would be raised by the middle of 2016 and inflation is projected to return to target within two years.

Investec analyst Philip Shaw believes the BoE rate will begin to rise slowly in the first quarter of 2016, reaching 1.25% by the end of next year and 2.25% by end-2017. "Note though that if sterling continues to appreciate from current levels, the timetable for the normalisation of interest rates could be pushed back somewhat."

The pound rose against the dollar, but bigger earlier gains were eroded as the greenback recovered following a modest decrease in weekly jobless claims in the week ended May 30. When the European equity markets closed, the pound was trading at USD1.5351.

According to a report released by the US Labor Department, initial jobless claims edged down to 276,000, a decrease of 8,000 from the previous week's revised level of 284,000. Economists had expected jobless claims to slip to 278,000 from the 282,000 originally reported for the previous week.

Investor focus now turns to the US unemployment rate and nonfarm payrolls data due Friday at 1330 BST, as the market keeps a wary eye on indications concerning a potential Federal Reserve rate hike.

On the corporate front, easyJet reported a strong rise in passenger numbers in May, and its planes were more full. The low-cost airline said it flew nearly 6.5 million passengers in May, up 7.2% from nearly 6.1 million a year earlier, while its load factor, a measure of how full its planes are, rose to 91.6% from 89.4%. On a rolling 12-month basis to the end of May, its passenger numbers were up 6.1% to 66.6 million from 62.8 million, while load factor rose to 91.2% from 89.9%. EasyJet shares ended up 0.9%.

Kingfisher was the best-performing stock in the blue-chip index, up 2.9%, after Merrill Lynch upgraded the DIY retailer to Neutral from Underperform.

Johnson Matthey fell 5.3%, even though it reported a large rise in pretax profit and its dividend that both comfortably beat market expectations after most of its divisions reported strong sales growth, partially offset by a weaker performance from the precious metals business.

However, the FTSE 100-listed speciality chemicals and metals company gave a mixed outlook for its businesses in the current year. Johnson Matthey said the Process Technologies division is likely to have a "more challenging" time in the year to end March 2016, while Precious Metal Products results will be "significantly down" in the current financial year as a result of the sale of its gold and silver refining business.

VSA analyst Paul Renken said traditional manufacturing and catalyst markets have been showing some weakness, with sales down along with platinum group metals prices. He says Johnson Matthey continues to invest in new business and technology applications to stay at the forefront of innovation in the PGM space. "However, whether growth in new applications business will offset the pace of decline in traditional markets has yet to be determined, in our view. We have some doubts," he wrote.

Mining stocks were amongst the worst-performing stocks in the FTSE 100, with Anglo American down 4.1%, Fresnillo down 3.0%, BHP Billiton down 2.2%, Glencore down 2.6% and Randgold Resources down 3.4%.

IG Markets analyst David Madden said miners were hit by the news that a Chinese broker is cutting back on margin trading, and this signals the strain the second-largest economy in the world is under. "China’s economy is too dependent on credit and it feels like the pressure cooker is about to blow," wrote Madden.

Despite an intensification of activity this week, Greece and its creditors failed to reach an agreement after crucial talks in Brussels late Wednesday, though both Athens and the EU claimed to have made progress towards a solution and apparently hope to wrap up the deal by the middle of the month. Both side have proposals on the table.

"It was a good, constructive meeting. Progress was made in understanding each other's positions on the basis of various proposals," the European Commission said. "It was agreed that they will meet again. Intense work will continue."

In the corporate calendar Friday, Halfords Group, Fuller Smith & Turner and KCOM Group release full year results, while Edinburgh Worldwide Investment Trust publishes half year results. Bellway issues an interim management statement.

In the economic calendar, German factory orders are due at 0700 BST, while UK consumer inflation expectations are due at 0930 BST. Eurozone GDP is due at 1000 BST. Oil ministers from the Organization of the Petroleum Exporting Countries will meet in Vienna.

By Daniel Ruiz; danielruiz@alliancenews.com

Copyright 2015 Alliance News Limited. All Rights Reserved.