As interest rates and Iraq sent leading shares tumbling to a seven week low, water companies remained buoyant on renewed suggestions they could be takeover targets.
Analysts at Deutsche Bank said infrastructure funds or sovereign wealth funds could be interested in the businesses for their strong asset backing, stable regulatory regime, inflation-linked growth and their ability to support high levels of debt.
Severn Trent - which last year saw off a £5bn bid from a Canadian led consortium - edged up 1p to £19.74 and United Utilities was up 6.5p to 893p. Pennon however dropped 11.5p to 765p.
Any deals would be unlikely before the latest five year business plans are approved by regulator Ofwat, expected later in the year. Deutsche said:
We think there is a meaningful chance of more bids in the sector at significant premia to current share prices after the completion of the review, or potentially sooner for Pennon given South West Water's enhanced status and Ofwat's assurances around its regulatory determination.
Based on our analysis we think a bidder could pay around £25 a share for Severn Trent, around £10 a share for Pennon; and around £11.50 a share for United Utilities.
Overall the FTSE 100 dropped 65.26 points or 0.95% to 6777.85, the biggest daily fall since 11 April. Over the week the index has lost around 80 points, denting hopes that it could breach its all time closing high of 6930, achieved on 30 December 1999 at the height of the dotcom boom.
Housebuilders and retailers were hit by comments from Bank of England governor Mark Carney that interest rates could rise sooner than the market expected. Persimmon lost 91p to £12.11, Barratt Developments dropped 23.3p to 346.3p and Taylor Wimpey fell 7p to 104p.
High street businesses fell back on fears that dearer borrowing could dent consumer spending, with Sports Direct International down 39p at 779p, Kingfisher closing 15.2p lower at 369p and SuperGroupoff 63p at £10. Chris Beauchamp, market analyst at IG, said:
There have been scarier Friday the 13ths in markets, but for the FTSE a drop of 1% has been rather unnerving. Crucially the index tested the 6770 level around midday, but as expected, buyers were found. Disappointingly however, any bounce from here will run straight back into the 6870 region that has been a real barrier so far this year. The real damage from Mr Carney's speech has been wrought in housebuilders, which have been shown to be extremely vulnerable to greater speculation about rate hikes. Crucially, Mr Carney stressed that increases would be gradual. In a sense, the UK is going through its own 'taper tantrum'. Ben Bernanke's careful hints about a reduction in QE set the cat among the pigeons, but when the taper did arrive markets were much calmer. Mark Carney is presumably aiming for a similar effect. Such is the magic of central banking.
The other factor undermining sentiment was the renewed unrest in Iraq, which sent oil prices higher and airline shares lower, due to rising fuel costs. The sector has also been hit by recent profit warnings from Aer Lingus and Lufthansa. So International Airlines Group, owner of British Airways and Iberia, ended 12.2p down at 379p and easyJet fell 44p to £14.57.
Companies involved in Iraq have suffered a volatile few days, but edged away from their lows on Friday. Genel Energy added 0.5p to 972p while Gulf Keystone Petroleum rose 1.5p to 81.5p. In an update Gulf Keystone said:
Our operations in the Kurdistan Region of Iraq are progressing in line with our previous guidance, whilst we remain alert to the current security situation in Iraq, which has recently escalated outside the Kurdistan Region. We projected that Gulf Keystone would reach 20,000 gross barrels of oil a day of production by the end of the second quarter of 2014 and...we are now very much on schedule.
Among the mid-caps Petra Diamonds was a shining star, adding 12.9p to 180p. The company said it had found a rare 122.52 carat blue diamond found in South Africa, and analysts believe the gem could fetch more than $35m. Martin Potts at finnCap said:
The stone is so unusual that it will require considerable analysis before Petra is in a position to sell it; it will not be sold in the year ending 30 June 2014. So far, the highest price on record paid for a rough diamond was $35.3m, paid in February 2010 for a 507 carat white stone. We think that this stone may break that record.