Concerns about the US economy weighed heavily on global stock markets on Monday as investors focused on comments from Federal Reserve officials and the ongoing debt-ceiling debate.
The FTSE 100 finished down 39.06 points on the day at 6,557.37.
"Those of the opinion that stock markets have overshot to the upside in recent months will feel emboldened by the performance in recent days - if markets can't hang on to last week's Fed-inspired sharp gains, surely this is a market that has further to fall?" said Chief Market Strategist David Jones from IG
"The next few days will show if that appetite to buy in dips is still there for investors, with many looking at the 6,500 level as the potential floor for any further FTSE weakness."
Markets were also reacting to mixed manufacturing data from the world's largest economies today: the purchasing managers' index (PMI) for China's manufacturing sector rose from 50.1 to a six-month high of 51.2 in September, ahead of the 50.9 excepted; the Eurozone manufacturing PMI declined from 51.4 to 51.1 (forecast: 51.7); while the US manufacturing PMI slipped from 53.1 to 52.8 (forecast: 54).
German elections in focus
Markets across Europe finished lower on Monday in the aftermath of the German elections this weekend. Chancellor Angela Merkel's Christian Democratic Union party won 41.5% of the vote after gaining 311 seats in the Bundestag, though this was four seats shy of an absolute majority.
The current coalition partner, the Liberal Democrats (FDP), missed out of the 5% minimum threshold and will not be represented in parliament meaning that Merkel is left having to build a new coalition with either the Social Democrats (SPD) or the Green Party, who won 25.7% and 8.4% of the vote, respectively.
Senior Market Analyst Michael Hewson from CMC Markets reckons that a coalition with the SPD is the most probable outcome. However, he said: "This could well be complicated as they are more sympathetic to the idea of a banking union, something that Mrs Merkel has been reluctant to countenance, and any disagreements are likely to complicate the decision making process at a time when key decisions are needed with respect to Greece, and the European Stability Mechanism in the coming months."
Fed officials cast doubt over recovery; debt-ceiling worries resurface
Stocks initially gained strongly in the aftermath of last Wednesday's surprise decision by the Federal Reserve not to begin scaling back stimulus. However, gains were mostly erased by the end of last week after James Bullard, head of the St Louis Fed, admitted that the decision was a close call and that the central bank could still trim asset purchases at its next meeting.
Comments from other Fed officials dampened sentiment further today, including New York Fed President William Dudley who said that the US has yet to show "any meaningful pickup" in momentum. He said that the central bank must push hard against headwinds and he would only feel comfortable with a 'taper' as long as there is a "continued improvement in the labour market".
Meanwhile, talks surrounding the US debt ceiling were also catching the attention of investors today after President Barack Obama this weekend urged Congress to approve a budget to prevent a government shutdown by October 1st.
FTSE 100: Croda jumps on upgrade from Credit Suisse
Chemicals firm Croda was performing well after Credit Suisse upgraded its recommendation from 'neutral' to 'outperform' and hiked its target price from 2,600p to 3,000p. The bank said that headwinds seen in the first half will begin to reverse and the stock's 10% premium to the chemicals sector is justified.
Investment group Aberdeen trimmed early gains but still held in positive territory after saying that underlying profits should still come in at the higher end of analysts' forecasts despite a slight drop in assets under management in the fourth quarter.
FTSE newcomer Coca-Cola bottling group Coca-Cola HBC was among the worst performers, extending its losing streak into the third straight day. Matt Basi, Head of Sales Trading at CMC Markets, said that traders are "tak[ing] profits from the highs of last week - the best levels since the stock moved to the London market in April".
Banking stocks were also providing a drag with Royal Bank of Scotland, Lloyds and Barclays registering losses as risk appetite was scaled back.
British Gas owner Centrica declined after announcing the decision not proceed with its Baird and Caythorpe gas storage projects, leading to impairments of £240m this year.
Utility peer National Grid was also out of favour after analysts at UBS downgraded the stock from 'buy' to 'neutral', saying that the estimated future regulatory asset value (RAV) growth is already priced in.
FTSE 250: Dechra jumps after upgrade
Pharmaceuticals firm Dechra was a high riser today after Investec upgraded the stock from 'add' to 'buy' and raised its target price from 708p to 788p. The broker said: "Re-working our valuation methodology for the increased detail [following last week's results] we now have suggests a much higher value than we first thought."
Dairy foods company Dairy Crest edged higher after saying it continues to perform in line with company expectations, despite the challenging trading environment, and profit targets for the full year remain unchanged.
FTSE 100 - Risers
Croda International (CRDA) 2,727.00p +1.75%
Diageo (DGE) 2,050.50p +0.81%
Rolls-Royce Holdings (RR.) 1,115.00p +0.81%
GlaxoSmithKline (GSK) 1,589.50p +0.79%
IMI (IMI) 1,465.00p +0.76%
Burberry Group (BRBY) 1,631.00p +0.74%
British Sky Broadcasting Group (BSY) 874.00p +0.58%
Old Mutual (OML) 193.00p +0.57%
Vedanta Resources (VED) 1,122.00p +0.54%
Tate & Lyle (TATE) 770.00p +0.46%
FTSE 100 - Fallers
Lloyds Banking Group (LLOY) 73.91p -3.07%
Shire Plc (SHP) 2,520.00p -2.82%
Barclays (BARC) 266.35p -2.60%
Tullow Oil (TLW) 1,049.00p -2.42%
William Hill (WMH) 412.00p -2.42%
GKN (GKN) 352.00p -2.41%
Coca-Cola HBC AG (CDI) (CCH) 1,825.00p -2.41%
Fresnillo (FRES) 1,013.00p -1.94%
Compass Group (CPG) 839.00p -1.93%
Resolution Ltd. (RSL) 319.70p -1.84%
FTSE 250 - Risers
Alent (ALNT) 353.80p +4.06%
Dechra Pharmaceuticals (DPH) 720.00p +3.67%
Essar Energy (ESSR) 133.00p +3.58%
Vesuvius (VSVS) 444.70p +2.89%
Britvic (BVIC) 569.00p +2.62%
Daejan Holdings (DJAN) 3,744.00p +2.52%
SEGRO (SGRO) 306.90p +2.50%
Unite Group (UTG) 376.00p +2.12%
Crest Nicholson Holdings (CRST) 339.90p +2.07%
888 Holdings (888) 164.10p +1.99%
FTSE 250 - Fallers
esure Group (ESUR) 250.80p -4.53%
Carpetright (CPR) 651.00p -4.26%
Moneysupermarket.com Group (MONY) 144.50p -3.99%
Fidessa Group (FDSA) 2,012.00p -3.96%
PayPoint (PAY) 1,067.00p -3.53%
CSR (CSR) 502.00p -3.18%
Barratt Developments (BDEV) 316.10p -3.10%
Keller Group (KLR) 1,055.00p -3.03%
Enterprise Inns (ETI) 141.70p -2.95%
Fisher (James) & Sons (FSJ) 1,078.00p -2.88%