U.K. Stocks Head for Steepest Drop in Six Years; Sainsbury Fall

By Sarah Jones

Sept. 5 (Bloomberg) -- U.K. stocks dropped, heading for the steepest weekly drop in six years, led by commodity producers on speculation falling metal prices will force investors to sell mining shares. Ferrexpo Plc and Kazakhmys Plc dropped.

J Sainsbury Plc led food retailers lower as Deutsche Bank AG downgraded the shares and predicted ``tougher times'' ahead for supermarket chains.

The FTSE 100 Index dropped 68.3, or 1.3 percent, to 5,293.8 at 1:55 p.m. in London. The measure has declined 6.1 percent this week, the steepest drop since July 2002. The FTSE All-Share Index fell 1.2 percent and Ireland's ISEQ Index lost 4 percent, led by a retreat in banks.

The benchmark indexes extended declines after the U.S. unemployment rate climbed to the highest in five months, heightening the risk that the economic slowdown will worsen.

Ferrexpo, the producer of iron ore in Ukraine, dropped 8.9 percent to 180.3 pence as base metals retreated on the London Metal Exchange. Kazakhmys, Kazakhstan's biggest copper producer, declined 4.3 percent to 1,016 pence. Xstrata Plc, the world's fourth-largest copper producer, lost 4.1 percent to 2,503 pence.

``There were market rumors on expectations of significant hedge fund redemptions,'' John Meyer, an analyst at Fairfax I.S. Plc, told Bloomberg News by telephone. ``Technical issues are forcing funds to sell stocks.''

Sainsbury, Morrison

Sainsbury lost 3.8 percent to 334.25 pence after Deutsche Bank downgraded the U.K.'s third-largest supermarket chain to ``sell'' from ``hold.'' Deutsche Bank also downgraded William Morrison Supermarkets Plc, the smallest of the four main British retailers, cutting the company to ``hold'' from ``buy.'' The shares dropped 2 percent to 273.75 pence.

``We expect news flow on inflation, industry growth and competition to deteriorate over the course of the fourth quarter,'' said Deutsche Bank's James G. Collins and other analysts in a research note dated today.

Allied Irish Banks Plc led Ireland's largest lenders lower, falling 8.3 percent to 7.71 euros after Deutsche Bank downgraded the shares to ``hold'' from ``buy.''

Anglo Irish Bank Plc fell 10 percent to 5.01 euros. Irish Life & Permanent Plc, the country's biggest mortgage lender, dropped 6 percent to 6.38 euros.

The following stocks also gained or fell in the U.K. market. Stock symbols are in parentheses.

Informa Plc (INF LN) fell 28.5 pence, or 6.9 percent, to 386 after the U.K. trade journal publisher said its board rejected as too low a takeover bid by private equity investors led by Providence Equity Partners Ltd.

Johnson Matthey Plc (JMAT LN) declined 112 pence, or 7.1 percent, to 1,463. The producer of one-third of all autocatalysts used to control vehicle pollution was removed from Merrill Lynch's ``Europe 1'' list because of ``deteriorating'' automotive markets.

Merrill's ``Europe 1'' list is a group of stocks the broker says will deliver ``significant'' returns.

RSA Insurance Group Plc (RSA LN) rallied 5.2 pence, or 3.3 percent, to 163.5 on speculation the U.K.'s second-largest non- life insurer may receive an approach from Germany's Allianz SE or Italy's Assicurazioni Generali SpA.

RSA spokesman Simon Kutner declined to comment, as did Allianz spokesman Eduard Stipic. A Generali spokesman said the company doesn't comment on market speculation.

SMG Plc (SMG LN) soared 1.05 pence, or 11 percent, to 11 after Scotland's largest commercial media company said it plans to buy back as much as 30 million pounds ($53 million) in stock through a tender offer. The company also proposed changing its name to STV Group Plc.

-- With reporting by Mark Herlihy and Jon Menon in London. Editors: Malcolm Fried, Andrew Clapham

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.