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FTSE CLOSE: Footsie eases off its worst levels | IAG, Royal Mail and Direct Line climb | United Utilities and Severn Trent fall

Published: 02:50 EST, 1 August 2014 | Updated: 11:40 EST, 1 August 2014

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Close: The London stock market has clawed back some lost ground after US jobs data judged to be not too hot and not too cold cheered investors

US jobs data judged to be of the 'Goldilocks' temperature that can steer the Fed away from rate rises was enough to lift markets back up but not regain all ground lost.

The FTSE 100 closed down 0.76 per cent, or 51 points, at 6,679, while the Dow Jones was trading down 0.67 per cent at 16,452 at 5pm UK time. It had been down 1.5 per cent at one point this morning.

Into the red: Markets today took a tumble.

Mining stocks were hit during the sell-off in London, with Rio Tinto down 1% or 37.5p to 3354.5p and commodities giant Glencore 3.9p lower at 356.2p.

Water company United Utilities was the biggest faller in the top flight, off 34p to 856p, after broker Credit Suisse cut its rating on the stock to underperform. Elsewhere in the sector, Severn Trent dropped 58p to 1877p.

The same City firm also cut outsourcing group Capita to neutral from outperform, causing shares to fall almost 2% or 22p to 1180p.

Medical devices firm Smith & Nephew stuck by its outlook for the year, even though its advanced wound management business is set to grow by less than the market. Operating profits were 29% lower at £134 million in the first half of the year but shares still rose almost 4% or 39p to 1065p.

International Airlines Group (IAG) also rose after its half-year figures soothed investor nerves in the wake of profit warnings from Lufthansa and Air France-KLM.

Chief executive Willie Walsh said the British Airways and Iberia owner was making solid progress as half-year operating profits rose to 230 million euros (£182 million) from a 33 million euro (£26 million) loss a year earlier. Shares climbed 7.4p to 338.2p.

In the FTSE 250 Index, Direct Line Insurance climbed 5% or 14.4p to 299.4p after it announced a special interim dividend of 10p a share alongside results showing operating profits of £249.1 million, down 13.1%.

Direct Line said that pressure on prices eased in the second quarter, although it was too early to say if the market had reached the bottom of the cycle.

The biggest risers on the FTSE 100 were Smith & Nephew up 39p at 1065p, BG Group up 36.5p at 1208.5p, Royal Mail up 10.7p 428.1p and IAG up 7.4p at 338.2p.

The biggest fallers on the FTSE 100 were United Utilities down 34p at 856p, Severn Trent down 58p at 1877p, Schroders down 61p at 2329p and Johnson Matthey down 75p at 2884p.

14.00: The Footsie eased off its worst levels in early afternoon trade after US jobs showed slower than expected growth in July and the unemployment rate saw a surprise fall slightly easing recently heightened fears that the Federal Reserve could start raising interest rates sooner rather than later

But the UK blue chip index still remained almost 1 per cent lower, down 58.5 points at 6.672.3 as a welter of other geopolitical concerns saw investors shun taking positions in stocks ahead of the weekend.

US non-farm payrolls increased by a smaller than expected 209,000 last month after surging by 298,000 in June. However July still marked the sixth straight month that employment has expanded by more than 200,000 jobs, a stretch last seen in 1997.

Further falls: US stocks are still expected to extend Thursday's slump even though slower than expected US jobs growth in July eased Fed rate hike fears

The unemployment rate ticked up to 6.2 per cent in July, from 6.1 per cent in June. Economists polled by Reuters had expected payrolls to increase 233,000 last month and the unemployment rate to hold steady.

Meanwhile, average hourly earnings, which are being closely monitored as a potential signal of reduced slack that could prompt the Fed to raise rates, were flat.

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Angus Campbell, senior analyst at FXPro said: ‘This is a key metric watched by the US’s Federal Reserve and it comes as little surprise to see the dollar giving back some of its gains from recent days. Even equities have bounced with some relief following a couple sharp sell offs.’

But he added: ‘Despite today’s hiccup in average earnings, Thursday’s employment cost index was higher than expected, setting off a few alarm bells at the Fed and this will all translate into a stronger US economy.’

Fed officials said on Wednesday, following their latest monetary policy setting meeting, that ‘significant’ slack remained in the labour market, signalling patience on the interest rate front.

But the slightly weaker than expected jobs report today is unlikely to change perceptions about strong economic growth in the third quarter. Data earlier this week showed the US economy grew at a better than expected 4.0 per cent year-on-year in the second quarter, after shrinking by 2.1 per cent rate in the first three months of year.

Most economists are looking for the first increase in interest rates from the Fed in the second quarter of next year.

On currency markets, the pound came off an earlier, fresh six week low of 1.6814 versus the dollar after the US data, but it still stayed weak at 1.6839 after a survey today showed growth in Britain's beleaguered manufacturing sector during July was its lowest for a year, denting UK rate hike expectations.

US stock futures also came off their worst levels following the jobs report release but still indicated further falls by US blue chips today following yesterday’s 317 point slump, which was the biggest drop since February.

A debt default for Argentina, the deepening woes of Portugal's Espirito Santo bank, the West's sanctions against Russia, and further conflict in Gaza were among factors driving stocks lower.

Israel said it was resuming military operations today, claiming that Hamas broke the planned ceasefire within hours of it being agreed. According to reports, nearly 30 were killed in Gaza from an Israeli attack on Friday morning.

In London, heavyweight mining stocks remained the worst casualties as investors’ risk appetite disappeared, with Rio Tinto down 1.7 per cent or 56.5p to 3,335.5p and BHP Billiton off 29.5p at 1,999.5p.

Banks were also badly hit, led by Royal Bank of Scotland down 2.6 percent, or 9.2p at 346.1p.

The part-nationalised bank fell as Investec Securities analyst Ian Gordon cut his rating on the lender to sell from hold, arguing that RBS still faced pressures from litigation costs and impairment charges.

‘We continue to forecast negative earnings and anaemic returns,’ Gordon said in a note to clients.

13.00: The Footsie slumped to a three month low by mid session, down 1.25 per cent in value as a 'perfect storm' of political and economic events triggered a correction for world markets.

A debt default for Argentina, the deepening woes of Portugal's Espirito Santo bank, fresh conflict in Gaza and the West's sanctions against Russia were among factors driving stocks lower.

By lunchtime, the FTSE 100 index was down 83.4 points to 6,646.7, just easing off the hefty session low of 6,624.72.

Traders spooked: Big falls by global markets knocked the Footsie sharply lower with US jobs data awaited

Traders in the Square Mile took their cue from across the Atlantic, with New York's Dow Jones Industrial Average plunging by 317 points on Thursday, the biggest drop since February.

New fears about the US Federal Reserve pulling away stimulus and contemplating rate hikes, as well as a rash of poorly-received American corporate results, combined with the sense that a correction in the stock market was long overdue, pushed traders into sell-off mode.

Wall Street had seen five straight months of gains but trading screens turned red as July came to a close and investors banked profits. London followed today while Paris's CAC 40 and Frankfurt's Dax also plunged.

On currency markets, the pound was also down today, dropping a cent against the US dollar as a survey showed growth in Britain's beleaguered manufacturing sector during July was its weakest for a year.

But the main economic focus was on key US July jobs data, due at 1.30 pm, and its implications for US interest rates, with better than expected non-farm payrolls and unemployment data coming after a strong rebound in US second quarter growth earlier this week likely to put pressure on the Federal Reserve to consider a hike sooner rather than later.

Mining stocks bore the brunt of the sell-off in London, with Rio Tinto down 3 per cent or 90.25p to 3,301.5p and commodities giant Glencore 9.3p lower at 3,50.7p.

Water company United Utilities was also one of the biggest fallers, off 30.75p to 859.25p, after broker Credit Suisse cut its rating on the stock to underperform. Elsewhere in the sector, Severn Trent dropped 49.5p to 1885.5p.

Credit Suisse also cut its rating for outsourcing group Capita to neutral from outperform, causing its shares to tumble 3 per cent or 43.5p to 1,158.5p.

A shortened risers board was led by medical devices firm Smith & Nephew as it stuck by its outlook for the year, even though its advanced wound management business is set to grow by less than the market.

Operating profits were 29 per cent lower at £134million in the first half of the year but shares still rose 2 per cent or 23p to 1,049p.

International Airlines Group also rose after its half-year figures soothed investor nerves in the wake of profit warnings from Lufthansa and Air France-KLM.

Chief executive Willie Walsh said the British Airways and Iberia owner was making solid progress as half-year operating profits rose to 230million euros (£182million) from a 33million euro (£26million) loss a year earlier. Shares climbed 4.1p to 334.9p.

On the second line, Direct Line Insurance climbed 3 per cent or 9.6p to 294.6p after it announced a special interim dividend of 10p a share alongside results showing operating profits of £249.1million, down 13.1 per cent.

Direct Line said that pressure on prices eased in the second quarter, although it was too early to say if the market had reached the bottom of the cycle.

10.15: The Footsie dropped further back as the morning session progressed in cautious trading ahead of key US jobs data and after figures showing weak manufacturing growth in the UK and Europe.

By mid morning, the FTSE 100 index was down over 1 per cent, or 75.6 points to 6,656.2 today, lower for a third straight session and on course to close below the 6,700 mark for the first time since July 11.

European markets shouldered even bigger falls, with Germany’s Dax 30 index down 1.9 per cent and France’s CAC 40 index off 1.1 per cent.

IAG up: British Airways' owner IAG gained after its half-year figures soothed investor nerves in the wake of profit warnings from Lufthansa and Air France-KLM

British manufacturing grew at the slowest rate in a year in July, possibly reflecting the prospect of higher interest rates at home and the impact of the conflict in Ukraine, a survey showed.

The Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI) fell to 55.4 from 57.2 in June - its lowest level since July 2013 and well below the lowest forecast.

Markit said growth was strong by historical standards and the slowdown was in line with the Bank of England's view that Britain's strong recovery will slow a touch in coming months.

But the drop may also be a symptom of uncertainty about the crisis in Ukraine, as well as the likelihood of monetary tightening in Britain, said Rob Dobson, senior economist at Markit.

Meanwhile, euro zone manufacturing growth failed to accelerate as expected last month despite factories barely raising prices.

With inflationary pressure evaporating and factory activity shrinking faster in France, the region's second-biggest economy, Markit's final July manufacturing PMI came in at 51.8, matching June's reading but below an earlier flash estimate of 51.9.

On currency markets, the pound sank further back against the US dollar, reaching another six week low at 1.6838 as the manufacturing PMI data eased expectations that the Bank of England could consider an imminent interest rate hike.

Heightened expectations that the Federal Reserve could implement interest rate hikes sooner rather than later following recent strong US data has boosted the dollar after a recent slump and spooked stock markets.

Wall Street saw its worst session since February yesterday, with a slump of 317 points by the Dow Jones Industrial Average wiping out all the gains seen this year and ending a run of five straight months of rises.

Recent US figures - rising wage inflation and a sharp rebound in economic growth in particular – are causing traders to tread cautiously amid speculation that robust data could prompt the Federal Reserve to tighten policy sooner than expected after the end of quantitative easing.

Today’s US July jobs report will therefore be the main focus. The consensus forecast is for a 231,000 gain in non-farm payrolls, down from a 288,000 jump in June, with the unemployment rate expected to remain unchanged after falling to 6.1 per cent in June, its lowest level since September 2008.

Mike van Dulken, head of research at Accendo Markets said: ‘As always though, the devil is in the detail and it may be that revisions and/or wages growth take centre stage in terms of what is seen as influencing the Federal Reserve's timing on that all-important first interest rate hike’.

Weakness in heavyweight mining stocks was the biggest drag on the blue chips as investors’ risk appetite evaporated, with Rio Tinto down 89p at 3,303p, Anglo American losing 37p at 1,562p, and BHP Billiton shedding 37p at 1,992p.

Glencore was also among the worst performers, off 8.2p at 351.8p as the commodities trader completed the $7billion sale of its Las Bambas copper project in Peru.

Hedge fund manager Man Group was the biggest blue chip casualty, down 4 per cent or 4.7p at 114.3p reflecting teh flight from riskier assets despite posting first half results showing a 7 per cent increase in funds under management.

And outsourcing group Capita was a big Footsie faller as well, shedding 2.8 per cent or 34p at 1,168p after broker Credit Suisse downgraded its rating for the stock to neutral.

But on the upside, International Airlines Group topped the very short FTSE 100 risers board, up 3.1p to 333.9p after its half-year figures soothed investor nerves in the wake of profit warnings from Lufthansa and Air France-KLM.

Chief executive Willie Walsh said the British Airways and Iberia owner was making solid progress as half-year operating profits rose to 230million euros (£182million) from a 33million euro (£26million) loss a year earlier.

Beverage can maker Rexam also advanced, up 3.5p to 504.5p after saying it posting first half results in line with expectations despite the impact of currency factors and high aluminium prices.

Currency factors also weighed on first-half profits at engineering group IMI, with its shares down 5p to 1,412p although the company saw organic revenues increase by 3 per cent.

Among the mid caps, Direct Line Insurance added nearly 3 per cent or 8.2p at 293.2p after it announced a special interim dividend of 10p a share alongside results showing operating profits of £249.1million, down 13.1 per cent.

08.30: The Footsie fell back in early trade at the start of a new month, extending yesterday’s sharp decline in tandem with drops overnight by US and Asian markets dogged by concerns over the impact of sanctions on Russia, a debt default by Argentina, and worries over likely US interest rate hikes ahead of key US jobs data today.

In opening deals, the FTSE 100 index was down 14.7 points at 6,715.4 having dropped 43.33 points yesterday.

The main focus will be the US jobs report, due at 1.30pm, with non-farm payrolls forecast to have risen by 233,000 in July, which would mark the sixth month of growth above 200,000.

Markets drop: Big falls overnight by US and Asian markets saw the Footsie fall back once again in early trade

Jonathan Sudaria, dealer at Capital Spreads said: ‘The ‘worst’ case scenario that is getting the bulls trembling is a repeat of last month’s data releases.

‘If we have another surprise sharp drop in the unemployment rate and another forecast smashing payrolls figure then there can be no doubting the trajectory of the US economy is on the up.

‘Unfortunately for the bulls, this will only solidify the speculation that monetary tightening is on its way sooner rather than later,’ he added.

Ahead of that US key data, the latest UK and euro zone purchasing managers indices (PMIs) will be released by research firm Markit at 9.30 am, giving a snapshot of the strength of the factory sector in Britain and its biggest trading partner.

Data released overnight showed China's vast factory sector posted its strongest growth in 18 months in July as new orders surged to multi-month highs, adding to signs the economy is regaining momentum after a flurry of government stimulus measures.

However the good news from the world’s biggest consumer of metals failed to support the heavyweight miners, with declines by the sector the main drag on blue chip sentiment as investors’ appetite for risk evaporated, with Rio Tinto and Anglo American both shedding 1 per cent.

Stocks to watch include:

ROYAL BANK OF SCOTLAND - The taxpayer owned lender said a vote by Scotland to become independent from the rest of the United Kingdom could significantly increase its costs and have a material impact on its business.

SMITH & NEPHEW - Europe's largest maker of artificial joints reported a 10 per cent rise in second quarter trading profit as its business regained some momentum after a weak start to the year.

ROYAL DUTCH SHELL - Woodside Petroleum failed to win shareholder approval to buy back $2.68billion of its shares from Royal Dutch Shell, Australia's top oil and gas company said after a vote on Friday.

GLENCORE - The miner has collected $7billion from China's MMG Ltd and its partners with the completion of the sale of one of the world's largest copper projects, the Las Bambas copper mine in Peru.

SSE - Firefighters were bringing a blaze at Ferrybridge coal-fired power plant in northern England under control, operator SSE said late on Thursday, adding no injuries had been reported and there was no impact on the UK's electricity supply.