Financials were the main drag on Britain's top share index on Friday, which fell sharply as concerns grew over the fragile state of the US economy and the country's bitter battle to deal with its debts. The UK's benchmark index shed 58.02 points or 1 percent to 5,815.19 on the last trading day of the month, though it recovered from a session low of 5,772.43.
But for the promise of a big payout for shareholders of mobile operator Vodafone, the index would have been weaker. "In the face of the selling, the FTSE has done remarkably well to prevent losses from being even greater, and late on in the session buyers crept back into the market," said Angus Campbell, Head of Sales at Capital Spreads.
"For one, the bond markets still believe that the storm clouds over the market will disperse by the time the deadline expires." London's blue chip index traded in the red all day. Investors reacted negatively as the US edged closer to defaulting on its debts after a planned vote on a budget deficit plan scheduled for Thursday night was put off.
A deal must be agreed by August 2. Analysts have estimated that a default could see as much as 30 percent wiped off the value of global stock markets. Banks and insurers, seen as having the biggest exposure to sovereign debt, fell sharply, with Lloyds Banking Group and life insurer Standard Life down 4 and 1.4 percent, respectively.
The index retreated further, briefly, after data showed the United States' economy was in worse shape than many had feared. The "Great Recession" was even greater than previously thought as new measures showed economic output declining a cumulative 5.1 percent instead of 4.1 percent between 2007 and 2009. And fresh figures revealed the world's biggest economy grew less than expected in the second-quarter of 2011.
Meanwhile, business activity in the US Midwest grew less than expected this month as the labour market weakened, and US consumer sentiment fell in July to its lowest point in more than two years, adding to the gloomy picture, knocking investor confidence. The FTSE volatility index was up nearly 5 percent.
Adding to jitters, Moody's placed Spain on review for a possible downgrade, and French bank Credit Agricole said an expected loss at its Emporiki unit and its participation in the EU Greek rescue plan would force it to take a second-quarter provision of up to 850 million euros.
"With Moody's putting Spain on review for downgrade this morning and 10-year bond yields for Italy and Spain steadily increasing towards the critical 7 percent, we remain concerned about future writedown risk at Credit Agricole and other banks exposed to risky sovereigns," Espirito Santo Bank said.
Vodafone contributed 13 points to the index, rising 4 percent after saying it would pass on $3.3 billion to shareholders out of a long-awaited dividend from its stake in Verizon Wireless. BSkyB also said it would dish out 1 billion pounds ($1.6 billion) to investors who lost out when News Corp dropped its bid for the satellite broadcaster. But a billion was not enough to overcome concerns about future business, and the shares slipped 0.56 percent.
International Airlines Group rose 2 percent after the company defied the gloom in the airline sector by swinging to a profit in the first half and predicting full-year earnings growth. Financial Times owner Pearson rose 3.1 percent as it raised its 2011 profit outlook after beating first-half earnings expectations.
The recession has seen many companies become leaner and meaner allowing them to strengthen their balance sheet and refocus their businesses on growth areas such as emerging markets, giving hope to investors that big business can survive the sovereign debt storm.
"The fundamentals are still in place. Companies are on the whole reasonably well placed, delivering excellent profits, and there's differentiation between the winners and the losers, which is so important for our stock-picking fund managers," said Oliver Wallin, Investment director at Octopus Investments, which manages 2.5 billion pounds ($4 billion). "The only dampener on performance are those debt headwinds, that are still strong enough to blow markets off course."
Fresnillo and Randgold bucked the trend of a weaker mining sector, as investors turned to the precious metal miners as a proxy for gold and silver, whose safe haven attractions has carried them near record highs. Miner Anglo American fell 3.3 percent after it missed first-half expectations.