Watchdog's water-pricing formula gets cautious welcome from City

Morgan Stanley is worried about further downgrades to its already bearish medium-term forecasts, and this is getting riskier given continuing weakness it sees in power and gas prices.

"If the steep power price flattens in the medium term, which we think it will, we see further downside to 2011 earnings. We think it plausible rating agencies could adopt a tougher approach, especially if power prices fall", it warns.

In this scenario, many bigger utilities could need to reduce debt, which would act as a further drag on growth. Its top picks are National Grid and France's GDF Suez, which is tipped to bid for International Power, ¼p firmer at 282½p.

Its least preferred are Severn Trent, up 49p at 1055p, United Utilities, up 13p at 497¼p - the FTSE100's two best performers today.

It had been feared Ofwat would resist pressure from the water companies to increase prices by double digits and, instead, slash them. Northumbrian Water responded with a jump of 10p to 265½p, making it the highest-rising second liner. Pennon also put on 10¼p at 497¼p.

Shares generally slammed into reverse after yesterday's gains with miners marked lower on the back of softer commodity prices.

The heavy weighting of the miners within the index left the FTSE 100 nursing a loss of 99.84 at 5264.97. But selling pressure was light with turnover slowing to a trickle.

The biggest losers among the miners were Xstrata, down 27p at 1070p, Kazakhmys, 29p to 1267p, and Eurasian Natural Resources 16p to 864¾p.

The biggest casualty among blue chips was the London Stock Exchange itself which saw its shares tumbled 32½p to 781½p as brokers continued to reflect upon yesterday's half-year results showing a drop in profits and further loss of market share.

The banks were also clobbered with Standard Chartered dropping 44p to 1563p, Barclays 7¼p to 309½p, and Royal Bank of Scotland ¾p to 35p.

The UK banking sector was suffering with its peers in Europe from the blowback coming out of Dubai's exploding debt problems.

As the emirate attempted to minimise the impact of a debt restructuring plan at two of its biggest companies, fears went into overdrive that a major sovereign default could be on the cards.

Dubia last night said its flagship developers Dubai World and Nakheel will have to delay repayment on billions of dollars of debt.

Today it attempted to calm the markets by stressing that the profitable DP World would not be needing to take the same action.

The looming crisis in Dubai sparked fears of a domino effect around the Middle East with the price of insuring sovereign debt in Qatar, Abu Dhabi and Bahrain rocketing by association.

Shares of Falkland Oil & Gas fell 7½p to 128½p after announcing plans to raise £50 million by way of a placing of 43.4 million shares at 115p.

The joint venture between Falkland and mining giant BHP Billiton, down 19½p to 1895p, is in advanced talks with Desire Petroleum, unmoved on 81p, to contract the Ocean Guarding rig to drill the first exploration well in the East Falklands Basin.

Investors were left licking their wounds in Asia this morning after more share price falls. In Tokyo, leading shares lost ground after the dollar breached the 87.00 (60p) barrier and fell as far as 86.52 - its lowest since July 1995.

Investors fret about a strong yen because it eats into exporter profits when repatriated. However, rises in mining shares after gold hit a record high put the brakes on losses. The Nikkei 225 fell 58.40 points to 9383.24.

In Hong Kong leading shares were down more than 1% with the Hang Seng sliding 242.19 points at 22,369.61.