FTSE dips as the Cyprus tax hits banking shares

LONDON REPORT

BRITAIN’S FTSE 100 fell yesterday as a surprise deposit tax in Cyprus hit banking shares, but the index ended off early lows as investors saw limited risk of larger European countries considering such a move.

The Cypriot levy, which has to be approved by the country’s parliament as part of a bailout deal, broke the tenet that depositors’ savings are protected, triggering a selloff in banking shares across Europe.

But investors took comfort from the fact there was no sign of a run on banks elsewhere in the Eurozone.

The FTSE 100 closed down 31.73 points, or 0.5 per cent, at 6,457.92 points, well off an intra-day low of 6,386.17 and just 1.1 per cent off a 5-year closing peak hit on Thursday.

“The volatility created by the Cyprus situation might be a good opportunity for some investors to re-enter,” Didier Duret, global chief investment officer at ABN-AMRO Private Banking.

“The Cyprus bailout is a special case regarding the disproportionate weight of the financial sector against the (island’s) GDP. It’s a one-off and we don't expect a spillover into the financial system in Europe.”

Investors cautioned that parliamentary approval of the rescue deal, scheduled for today, was key to Cypriot banks avoiding a collapse that could set a dangerous precedent for lenders in other struggling countries within the Eurozone.

Shares in UK-listed banks, which are exposed to the euro zone through the wholesale funding market, fell 1.3 per cent, with state-rescued Royal Bank of Scotland down around 3.4 per cent.

“There are doubts about whether the deal will go through and if that is not the case then the worst case scenario is that the Cypriot banking stem implodes,” said Philip Shaw, who is part of Investec’s asset allocation team.

“We’re advising clients not to panic and remind them that there are a number of other market-moving events even in the short term.”

He highlighted a statement from the US Federal Reserve’s Open Market Committee due tomorrow night, which was likely to give the markets some clue as to whether the central bank was discussing tempering its economic stimulus programme in light of recent, strong data.

The Fed’s stimulus programme has helped drive the FTSE's 22.5 per cent rise since June and Shaw expected the US central bank to keep its taps open - potentially supportive for shares.

“It’s the old mantra: ‘don’t fight the Fed’,” Shaw said.

Topping the FTSE yesterday was retailer Marks & Spencer after The Sunday Times wrote the Qatari sovereign wealth fund wants to lead an £8bn takeover of the chain.

The shares rose 6.9 per cent to 393.7 pence in volume, nearly seven times their 90-day average.