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Fiscal cliff overshadows FTSE; Melrose drops 11%

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Fiscal cliff overshadows FTSE; Melrose drops 11%

(16.55: Update) Britain’s markets closed lower on Friday as uncertainty dominated talks in the US about the fiscal cliff, and as politicians discussed how to make a series of tax rises and spending cuts that are due to hit at the start of next year.   

The FTSE 100 shed 1.27%, or 72 points, to 5,606 and the Mid-250 index fell 0.91%, or 107 points, to 11,577. Weaker sentiment has seen the FTSE 100 give up 2.6%, or 151 points and the Mid-250 index has lost 0.8%, or 95 points, since the start of the week.

Engineering buyout group Melrose (MRO.L) was the biggest faller on the FTSE 100, down 27p, or 11%, to 208p, as it predicted a slowdown in sales for 2013 due to ‘worsening economic conditions’.

However, engineering company IMI (IMI.L) took on 20p, or 2%, to 962p as it announced results in line with expectations despite the weaker profits in its Fluid Power division.

Pennon Group (PNN.L) fell 26.5p, or 4.2%, to 602p as analysts at Nomura cut their target price on the stock from 730p to 710p and analysts at UBS, JP Morgan Cazenove, Credit Suisse and Deutsche Bank also lowered their target prices.

Resources stocks were also out of favour as Eurasian Resources (ENRC.L) lost 14p, or 5%, to 259p, and Fresnillo (FRES.L) gave up 68p, or 3.5%, to £18.80.

(09:52 Update) Escalating tensions in the Middle East, alongside concern about the outcome of US budget talks between president Barack Obama and Republican lawmakers have dragged markets lower, showing how fragile investor sentiment is after this morning's quiet start to trading. See market report below.

The FTSE 100 is now down 0.5% to 5,647, heading towards a decline of more than 2% for the week. 

Melrose falls fast on flatlining FTSE

0859: Corporate news helped some London blue chips break out of a plodding holding pattern on European stock markets this morning, with any wider market vigor contained by the start of formal negotiations in the US on a deal to avert a ‘fiscal cliff’. 

Engineering firm IMI topped the FTSE 100, rising 32p or 3.4% to 974p after reporting that revenues for the four months to the end of October are 3% ahead of last year and 4% ahead for the 10 months year to date.

Serco (SRP.L) was next in line, up 1.8% to 554p after the international services business stated that it was on target to meet expectations for full-year results. Chief executive Christopher Hyman boasted of the company’s strength in diversification that was allowing it to cope with ‘challenging US market conditions’.

Analysts at Panmure upgraded the shares from ‘hold’ to ‘buy’. ‘The company remains well positioned to win further work particularly in the UK given its broad service offering and margin structure,’ they noted

Conversely, the stand-out blue chip loser of the morning was Melrose , which saw its shares dive by 34p or nearly 15% to 201p. The industrial turnround specialist warned in its interim management statement that ‘initial indications point to current revenue trends having slowed’.

‘Trading is in line with expectations for 2012, although revenue trends have slowed, and recently the sales outlook for 2013 has become more uncertain,’ stated the group which earlier this summer acquired Elster, a US-listed German maker of electricity, gas and water meters.

Analyst Chris Dyett of Investec said of Melrose's statement: 'The only clarity is that there is not any.'

'Longer term, we still expect Melrose to offer above average revenue growth with the prospect of margin upside (predominantly from Elster),' Dyett concluded, maintaining his 'buy' recommendation on the shares.

Pennon Group , which yesterday reported more problems with its waste management business, was also lower after a string of share target price cuts from analysts at Deutsche Bank, UBS and JP Morgan. The shares were down 2% to 615p.

BP (BP.L) remained little moved after announcing yesterday that it had reached a settlement with the US Justice Department over the Gulf of Mexico oil spill, paying a record fine. Shares were flat at 425p, unmoved by a cut in the target price from Barclays to 500p from 510p.

The wider FTSE 100 sat at 5,678, with the FTSE 250 at 11681, also flat.

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