MARKET COMMENT: London Stocks End Down On S&P Outlook Cut

LONDON (Dow Jones)--British stocks fell sharply on Thursday, pulled down by banks and oil producers, as Standard & Poor's cut its credit-rating outlook on the country to negative.

The U.K. FTSE 100 index fell 2.8%, or 122.9 points, to 4,345.47.

Shares trading elsewhere in Europe were also under pressure, while U.S. stocks were also lower.

Stocks sold off on Wall Street on Wednesday, pulled down by a grim view on the U.S. economy from the Federal Reserve.

On the domestic front, Standard & Poor's cut its credit-rating outlook on the U.K. to negative from stable though it affirmed the country's AAA sovereign credit rating.

Mike Lenhoff, chief strategist at brokerage Brewin Dolphin, said that if S&P cut the country's credit rating, investors will demand a premium to hold U.K. financial assets.

"That premium will be reflected, in the case of bond markets, through higher yields. It will be detrimental to the international [equity] investor because they will have to take a hit on the currency with the risk that it will depreciate," he added.

"Having a credit-rating agency pronounce some judgment on the merits of the outlook for the U.K. economy is not a great thing. It's not very helpful and does blemish to some extent the more positive tone of the markets," he added.

Sterling declined 0.15% to $1.5714 against the dollar. Earlier it fell as low as $1.5515. Yields on 10-year U.K. government bonds rose 6 basis points to 3.64% .

The first test of the government's ability to raise cash came only about an hour after the S&P report. It succeeded, as the government was able to sell 5 billion pounds of debt, with the auction covered 2.6 times.

Banks, oil producers drop

Banks and oil producers, the sectors seen as most leveraged to any improvement in the economy, fell on Thursday. Standard Chartered shares were down 4.2% and BP (BP) shares were down 2.9%.

Miners were also weak, with Chinese steel mills reportedly seeking a 45% cut in iron-ore prices from Rio Tinto (RTP), down 7.2%. BHP Billiton (BHP), down 6.3%, secured the same price increase as Rio Tinto last year.

Credit Suisse equity strategists took the mining sector down to market weight from overweight in order move to a more defensive stance in their portfolio.

The noted that growth momentum in China appears to be peaking, inventories are up and valuations look stretched.

Turning to corporate updates and shares of property-investment giant British Land dropped 8.2% after its fiscal-year net loss widened to 3.9 billion pounds from 1.6 billion pounds a year earlier.

Property values fell sharply in the year and the firm said that continuing stress and disruption in the financial sector resulted in a "shocking year" for most markets.

Shares of Cable & Wireless fell 9.6%.

The telecom operator's fiscal-year adjusted operating profit climbed 36% to 822 million pounds ($1.3 billion), just exceeding analyst expectations for an 813 million pound profit. However, revenue of 3.65 billion pounds missed forecasts.

Shares of pub chain Mitchells & Butler fell 9% after its CEO, Tim Clarke, resigned after the company had to incur a 69 million pound loss from an interest-rate swap.

The interest-rate debacle came as the company reported its first half to April 11 results, with the group's loss narrowing to 6 million pounds from 87 million pounds. Adjusted pretax profit dropped 48% to 44 million pounds, while its revenue rose 3% to 1.02 billion pounds.