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Vodafone leads FTSE lower

Tuesday, September 04 09:40:22

Britain's top share index fell in early deals today paring the previous gain with the fallers led by Vodafone, as investors remained cautious ahead of a European Central Bank meeting on Thursday. By 0756 GMT, the FTSE 100 was down 26.75 points, or 0.5 percent, at 5,731.66, having broken a four-day losing streak in thin volume on Monday. Vodafone's fall accounted for about a fifth of the entire index's decline, hit by a rating downgrade on the mobile telecoms company to "market perform" from "outperform" by Bernstein, which also cut its earnings forecasts.

"With the exception of a justified re-rating around the Verizon Wireless dividend, Vodafone's share price has long been strongly correlated with service revenue momentum. We expect service revenues to turn negative for the first time since March 2010 in Q2 FY2013, and for the share price to follow," Bernstein said in a note. Vodafone's revenues are 7.2 percent below their 5-year average, according to Thomson Reuters Starmine data, and the worst among its European telecom peers. The FTSE 100 for the time being is bound in its 200 point range between 5,680 and 5,880 established in early August with low volumes and skittish trade characterising the past month in the build up to the ECB meeting.

A cut by credit rating agency Moody's, which changed its outlook on the "Aaa" rating of the European Union to "negative" and warned it could downgrade the bloc, added pressure on the ECB to take new steps to fight the euro zone debt crisis. "There is a lot of nervousness out there with a lot of investors sitting largely on cash, not wanting to commit because of the backdrop in Europe and what is coming up over the course of the month," James Humphreys, senior investment manager at Duncan Lawrie Private Bank, adding he expected the ECB to act with some form of bond buying with a cap on yields.

Broker downgrades also knocked luxury goods firm Burberry and UK retailer Next. Burberry fell 1.1 percent after Barclays cut its rating on the firm to "equalweight" from "overweight" on valuation grounds and reduced its target price to 1,600 pence from 1,950 pence. Next shed 1.1 percent after Societe Generale, in a broader note on European retailers, rated the British High street fashion retailer and Swedish peer H&M each as "sell" saying the two look unlikely to disappoint in the short term, but their valuations are relatively high leaving them vulnerable to any weakening of newsflow beyond this point. Uncertainty over the extent to which the ECB will announce details of a debt-buying scheme is capping market momentum. ( C) Reuters