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Energy stocks slump after break-up threat

Energy stocks slump after break-up threat

British Gas owner Centrica (CNA.L) was the biggest faller on a flat FTSE 100 on Monday morning, suffering after energy secretary Ed Davey suggested that the UK gas supplier might have to be broken up.

Centrica dropped 3% to 304p, with SSE (SSE.L) following in its wake, down 1.1% to £13.41, after Davey called on the energy regulator to investigate profits made by the Big Six energy suppliers.

In his letter to Ofgem, Davey singled out Centrica and SSE suggesting that their high profit margins in gas supply may require regulatory action, including the potential dismantling of the companies.

Investors in utility shares are accustomed to political risk. Davey’s intervention marks the latest salvo in the increasingly charged political battle over high energy bills, which started with Labour leader Ed Miliband’s pledge to freeze prices if his party wins next year’s general election.

‘It is very difficult for investors to price in political risk for UK utilities at this time,’ commented analysts at Liberum of Davey’s intervention. ‘By explicitly raising the prospect of splitting SSE and Centrica up, Mr Davey has once again increased the degree of risk and uncertainty faced by shareholders,’ they added.

The utility companies’ share price losses capped any broader market strength, with the FTSE 100 up just 0.1% at 6,580, behind gains of 0.4% on the pan-European Eurofirst 300.

FTSE gains

The UK’s index is however still heading for its fourth consecutive day higher, with investors breezing past a mixed update on the US labour market on Friday. Fears over the state of emerging markets seem to have fallen by the wayside, ahead of economic data reports on Chinese trade and inflation later this week.

However there was enough economic uncertainty for the price of gold to rise for a second day, up 0.6% to $1,274 per ounce, while silver gained 1% to $20.18.

Gold and silver miners followed the price of the precious metals higher, with Fresnillo (FRES.L) gaining 3.5% to 820p and Randgold (RRS.L) climbing by 1.9% to £45.09.

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