Fears focus on volatility as markets open

TRADERS will return to work this week hoping for a calmer start than last Monday, when the downgrade of the US credit rating sparked the highest levels of volatility seen in years in US and European markets.

Traders were described as “shell shocked” and investors “scared and nervous” after a week in which the FTSE 100 broke through the critical 5,000 level twice in five sessions amid massive positive and negative swings.

Both traders and former City minister Lord Myners (pictured) also criticised European governments’ decision to try to calm markets by banning short selling of banking stocks in four countries.

“While bans such as these usually generate a brief pop higher, in the longer term they don’t address the underlying problems and merely serve to delay the inevitable, and we could well see further volatility,” said CMC Markets analyst Michael Hewson.

Lord Myners said shorting had not been a contributory factor to share price falls seen by institutions such as France’s number two bank Societe Generale, which lost more than 20 per cent during Wednesday’s trading as investors panicked over its health.

Instead, he called for action by both the Financial Services Authority and the Treasury to address high-frequency trading, an electronic system that places trades in micro-seconds that he believes exacerbated volatility.

“High-frequency trading appears so detached from the true function of capital markets, but is potentially fraught with hazard. It definitely deserves more attention than either the FSA or the Treasury has given it,” Myners told the Sunday Telegraph.

The FSA said it was contributing to a Europe-wide consultation into guidelines for HFT launched by the European Securities and Markets Authority.

Analysis: A long week in the markets
Monday 8 August
Trading screens fill with red in the first session of the week after S&P strips the US of its triple-A credit rating. Mass selling leaves the FTSE down 3.4 per cent at 5,105 after a day traders liken to 2008.

FTSE finishes 178 points lower

Tuesday 9 August
FTSE 100 slumps below the 5,000 mark for the first time since July 2010 as the confidence crisis deepens, but after huge volatility the index closes up one per cent for the day.

Wednesday 10 August
A pledge by US Federal Reserve chairman Ben Bernanke (below) to keep US interest rates low sparks a relief rally – but that evaporates as markets seize on unfounded rumours over France’s sovereign rating and French banks’ financial health. The FTSE closes at a recent low of 5,007.

Societe Generale closes 15% down

Thursday 11 August
FTSE drops briefly below 5,000 as French banks again fend off rumours over their strength, but rallies to close 3.1 per cent up after French president Nicolas Sarkozy schedules talks with Angela Merkel (below right) for this Tuesday to find a fix for the Eurozone.

Gold tops $1,800 an ounce

Friday 12 August
France, Italy, Spain and Belgium ban short selling of their banks overnight on Thursday. The FTSE rallies to a second positive close at 5,320.