Tesco and miners weigh on FTSE 100

Tesco was among the sharpest fallers on Monday as the FTSE 100 drifted down from record territory.

Ahead of full-year results due on April 22, Tesco slipped 2.7 per cent to 244.3p. The stock's 30 per cent year-to-date rebound has revived speculation that Tesco might make an opportunistic move to strengthen its balance sheet.

While Tesco's loss of its investment-grade rating in January was seen to take the pressure off chief executive Dave Lewis to act quickly, asset writedowns and liabilities may still prompt management to act, analysts say. Barclays forecast Tesco's gross pension deficit to have exceeded £5bn at the full year, widening from £4.2bn in six months, and saw a possible £3bn property impairment charge.

Shore Capital said it expected Tesco's chief executive to stick with a message that a fundraising was "not currently part of its plans". However, it added: "With the stock re-rating there is a higher probability of a rights issue happening - the potential moving from 90:10 against to, say, 65:35 against now."

Weak Chinese export data for March and a sector downgrade from Citigroup meant miners led the wider market lower. The FTSE 100 lost 0.4 per cent, down 25.47 points at 7,064.30, as BHP Billiton fell 3.2 per cent to £14.16 and Glencore slipped 1.6 per cent to 285.2p.

Iron ore miners have "missed the window" to cut capacity and prioritise higher shareholder returns, meaning the downturn is likely to be more protracted, Citi said. "Self help, cost cutting and improving capital structure catalysts have played out and the sector is increasingly more vulnerable to lower commodity prices and macro conditions," it said.

Speculative interest helped squeeze Home Retail Group, long seen as a potential target for private equity, 5.6 per cent higher to 174.4p.

BP edged 0.3 per cent lower to 471p, with Merrill Lynch taking the stock off its "buy" list. Their call was based on a long-term Brent oil price of $80 a barrel and the worst-case penalty of $14bn under the US Clean Water Act.

While the maximum fine should not threaten BP's dividend, the "more uncertain" state and local claims from the Gulf of Mexico spill are not currently discounted in the share price, Merrill said. And while BP's 5.9 per cent dividend yield is about equal to European peers, it will be 2018 before organic free cash flow covers the payout, the broker added.

Engineer IMI lost 2 per cent to £12.74. Investec forecast flat earnings for two years as weak demand from the oil sector disguises management's progress towards improving the business.

Aviva added 1.2 per cent to 561.5p after brokers restricted during its takeover of Friends Life restarted coverage. Barclays, JPMorgan and Morgan Stanley all issued buy advice.

Packaging maker Smurfit Kappa rose 2.4 per cent to £29.40 on reports that US-listed International Paper was in the early stages of examining an offer.

Gulf Keystone Petroleum faded 5.1 per cent to 37p amid talk that T5 Oil and Gas, the acquisition vehicle run by former Tullow Oil executives, had been putting together an all-share reverse takeover of the Kurdistan explorer.

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