FTSE 100 suffers as oil and economics weigh on the index

After a brief opening spell in positive territory, the FTSE 100 headed resolutely downwards as oil price worries, continuing uncertainty over the eurozone and wariness ahead of some key economic data took their toll.

In early action, the FTSE 100 was down 74.18, or 1.16%, to 6342.98.

Opening gains reflected some positive comments on China from HSBC. The bank's latest analysis of the country's economy suggests its services sector is holding up well in the face of a downturn in manufacturing, "providing some counterweight to the downward pressures on the economy".

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But with US crude oil falling below $50/barrel for the first time since April 2009 there is now growing concern amongst investors that there may be more to the slump in prices than meets the eye.

Michael Hewson, chief market analyst at CMC Markets, says the continued weakness in oil prices appears to be starting to act as a drag on equity markets as investors start to look at some of the other reasons behind the move lower and focus less on the fiscal boost a lower price delivers to the final link in the chain, which is the consumer.

Investors are also exercising caution ahead of some key economic data, including official service sector readouts today for Japan, Europe, the UK and US. Later this week they will have eurozone inflation data, a Bank of England rate decision and the US non-farm payrolls report to contend with.

Hewson says that continuing economic weakness across Europe, as well as slowing Chinese demand despite this morning's slightly better than expected HSBC reading on China's service sector are reinforcing the idea of a slowing global economy. That in turn is causing investors to weigh up the risks of investing in Europe at a time when the European Central Bank (ECB) still appears tentative over further stimulus.

"That might help explain why the prospect of further loosening of monetary policy by the ECB appears to be underwhelming equity investors in Europe. Investors, understandably, might conclude that for all ECB President Mario Draghi's hints to the contrary, any [stimulus] measures the ECB takes are likely to be too little and far too late to make a significant difference."

With the Greek election also looming and talk of the country exiting the euro reaching fever pitch, investors are likely to continue dipping in and out of equity markets over the next few weeks until they see a clear direction of travel.

Meanwhile, sterling is suffering in the wake of yesterday's weaker than expected fourth quarter readings for manufacturing and construction. The data suggests that the recent rebound in the UK economy is starting to level off and slip back a little.

"While this slowdown in no way suggests that the economy is about to fall back sharply it does mean that the likelihood of a rise in interest rates looks further away than ever, and as such the pound has slid back though it still remains under pressure from a resurgent US dollar," says Hewson.

On the corporate front industrial equipment rental firm Ashtead slumped 6.9%, or 81p, to 1101p in early action as investors read across from a hefty fall for US peer United Rentals triggered by a broker downgrade.

Evercore shifted from "buy" to "sell" on United noting that the recent collapse in oil will affect energy investments and the construction market, a major exposure for the company.

Oil and gas stocks, notably Tullow Oil and Ophir Energy, fell in response to crude price weakness, while mining stocks, including Anglo American and Rio Tinto, were slightly ahead on HSBC's positive reading on China's service sector.