Falling financial stocks drag FTSE lower amid euro fears

Weaker financial stocks led British shares lower yeterday as the outcome of a Franco-German summit left investors still anxious about the Eurozone debt crisis and concerned about the impact of plans for a new tax on the industry.

The FTSE 100 index closed down 0.5 per cent at 5,331.60, having at one stage dropped back below the psychologically important 5,300 level, snapping a four-session winning streak which saw the index jump around seven per cent.

Weakness in banks was the biggest drag on the blue chips, with Barclays the worst off in the sector, down 4.2 per cent as concerns about their exposure to European debt continued after the meeting between French president Nicolas Sarkozy and German chancellor Angela Merkel.

“It seems back to business as usual as the banks took a knock today on euro zone debt concerns, although at least things are a little calmer than last week's roller coaster ride,” said Mic Mills, head of electronic trading at ETX Capital.

Merkel and Sarkozy’s meeting on Tuesday failed to provide any hoped for moves to alleviate the Eurozone debt crisis, such as creating a common euro zone bond, or increasing the size of the European Financial Stability Facility.

They did, however, unveil a plan to explore a financial transaction tax (FTT), which had a further negative impact on sentiment for financial stocks.

Interdealer brokers ICAP and Tullett Prebon were also among the top fallers on the FTSE 100 and FTSE 250 indexes respectively, down 3.7 per cent and 4.2 per cent, while mid cap spread-betting firm IG Group lost 3.7 per cent.

“One of the intended purposes of the financial transactions tax would be reduce trading volumes. This would be negative for businesses which thrive on the flow of financial transactions, such as IG,” Collins Stewart said in a note.

Strength in specialty metals and miners put a prop under the blue chips in London, with the sector supported by firmer copper prices on buying interest from Asia and as the dollar weakened.

Eurasian Natural Resources stood out, ahead 3.7 per cent after it posted first-half profit at the top end of expectations.

Gold also edged higher with safe-haven demand for bullion supported by uncertainty surrounding the euro zone debt situation, so buyers came in for precious metals miners.

Fresnillo was the top blue chip riser, up 5.6 per cent despite trading ex-dividend.

Overall ex-dividend factors knocked 9.48 points off the FTSE 100 index yesterday, with Anglo American, British American Tobacco, Hammerson, HSBC, Pearson, Prudential and Standard Life all also losing their payout attractions.

Domestic macroeconomic data heightened investor unease.

The UK jobless rate rose unexpectedly to 7.9 per cent, compared with forecasts for an unchanged reading of 7.7 per cent, while British jobless claims jumped by the most in over two years.

“Whilst this is poor, and may serve a political purpose, we are more concerned by the sharp drop in the number of hours worked, down one per cent year-on-year, despite the numbers employed rising one per cent over the same period,” said Gerard Lane, equity strategist at Shore Capital.