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The FTSE 100 dropped heavily, but avoided the worse drops of some of its international peers, helped by some of the UK’s biggest banks and supermarket groups.
The index closed down 0.5% after losing 40.03 points and closing on 7,445.25.
It had been trading down only around 0.2% earlier in the day, but took a further tumble in the afternoon after markets opened in the US.
“It’s been a broadly weaker session for European shares today, as we start a new week with higher yields and inflation worries continuing to temper appetite for risk,” said Michael Hewson, an analyst at CMC Markets.
“The prospect of a faster pace of US rate rises has continued to keep markets on edge, with losses accelerating as US markets reopened after the weekend.”
He said that the FTSE 100 held up better than others due to gains at HSBC and Barclays, who were helped by rises in bond yields.
He added: “Optimism that there will be no further restrictions imposed over the next few weeks is seeing the likes of British Airways owner IAG continue to build on the gains of last week.
“We’re also seeing Tesco and Sainsbury’s outperform ahead of the release of their latest trading updates later this week.
“On the downside housebuilders are acting as a drag after weekend reports that the government is looking to compel property developers to bear the cost of fixing the cladding crisis.”
The plan would protect leaseholders from getting trapped in unsellable homes, but could cost the industry as much as £4 billion according to some estimates.
In New York, the S&P 500 was trading down 1.4% and the Dow Jones down 1.2% just before markets closed in London.
Frankfurt’s Dax closed down 1.1%, while the French Cac 40 index dropped 1.4%.
In currency markets the pound could buy 0.1% more dollars by the close of stock trading in London, at 1.3569.
It was flat at 1.198 against the euro.
In company news, online trading business Plus500 said it will beat expectations in its full-year results as pre-tax earnings will reach 387 million dollars (£285 million) for the year according to its latest projections.
It came despite a slowdown in earnings and revenue growth because a boom in trading during the pandemic eased off.
But it has held onto many of the customers who joined during the pandemic.
Active customer numbers were around 406,000 through the year, which is “well ahead” of pre-pandemic levels.
Shares rose by 3.1%.
Shares in fast food chain Tortilla surged 5.2% after the firm said it had been helped by lockdowns over the last year.
The business, which joined the stock market in October, revealed a 79% rise in revenue in the year to January 2, while like-for-like sales were also up 24% compared to 2019.
The chain runs 64 food sites.
The biggest risers on the FTSE 100 were Vodafone, up 2.86p to 117.46p, BAE Systems, up 13.4p to 572p, CocaCola HBC, up 57p to 2,671p, HSBC, up 9.7p to 492p, and British American Tobacco, up 49p to 336.6p.
The biggest fallers on the FTSE 100 were Spirax-Sarco, down 995p to 14,215p, United Utilities, down 358p to 5,700p, Experian, down 185p to 3,229p, Persimmon, down 144p to 2,650p, and Halma, down 151p to 2,823p.