BRITAIN’S top share index began the final quarter of 2011 on a downbeat note as investors trimmed positions in banks and miners on familiar concerns over Greece’s debt problems and worries about growth in Asia.
A 2012 draft budget approved by Greece’s cabinet on Sunday predicted a deficit of 8.5 per cent of gross domestic product for 2011, missing its 7.6 per cent target, even with more austerity measures.
“This suggests that Europe’s debt problems have come to a head and that the potential for a Greek managed bankruptcy and major bondholder haircut in the 50 per cent range appears increasingly likely,” said Colin Cieszynski, market analyst at CMC Markets.
Twitchy equity investors, keen not to get caught out on the wrong side of a sell-off, trimmed positions in banking shares as concerns grew that the Eurozone debt problems could lead to a fresh banking crisis.
Highlighting the impact the debt crisis is having on the banking sector, Moody’s said it was reviewing the rating of Franco-Belgian bank Dexia on concerns about its liquidity position.
Banks led the blue chip fallers, with Royal Bank of Scotland down 4.4 per cent, while the cost of insuring European government debt and European bank’s debt increased to close to record levels.
“This is a clear sign that the markets know and understand how interlinked the banking system is – no bank is insulated from this crisis as a chain is only as strong as its weakest link,” Louise Cooper, markets analyst at BGC Partners, said.
Yesterday, Eurozone finance ministers were due to discuss ways to leverage their EFSF bailout fund although traders said they would not be holding their breath for a swift resolution.
The FTSE 100 closed down 52.98 points, or 1 per cent at 5,075.50, continuing the volatile trend seen in the previous quarter, when the index sank 14 per cent on dual concerns over the Eurozone debt crisis and the United States lapsing into another recession.
The risk-off trade was not confined to banks as miners fell too in tandem with metal prices. Copper touched its lowest level since July 2010 as September factory activity in some of Asia’s biggest economies slumped to levels last seen during the depths of the financial crisis as export demand dropped.
Even in China, which reported a slight uptick in its official PMI on Saturday, economists saw evidence of a cooling-down as the increase in factory activity was smaller than average.
Miner Vedanta Resources fell 8.3 per cent, while Morgan Stanley cut its forecasts for the mining sector on the diminishing prospect of global growth being robust enough to deliver stronger base metals prices next year.
Luxury goods company Burberry shed 7 per cent, extending its slide in the past four sessions to 18 per cent, as investors continued to fret about the firm’s exposure to China.
“The global economic slowdown has become increasingly apparent after the conspicuous lack of a Q3 bounce-back after the disappointing second quarter,” said Lothar Mentel, chief investment officer at Octopus Investments,
Perceived defensive stocks such as power provider International Power and utility Scottish and Southern Energy were among the few risers.