FTSE drops sharply as banks suffer in wake of stress tests

BRITAIN’S top shares fell sharply yesterday after the results of stress tests on European banks were met with disappointment over their credibility while investors were also fearful over the threat of a US default on the nation’s debt.

The banking sector index sunk to a two-year low as money managers and traders cast doubts over whether the stress test results, released on Friday, were stringent enough.

Lloyds Banking Group, Barclays, and Royal Bank of Scotland were at the top of the blue-chip fallers’ list, off 7.5 per cent, 7 per cent, and 6 per cent respectively.

Eight European banks – five in Spain, two in Greece and one in Austria – failed the test of their ability to withstand a long recession and will have to raise just €2.5bn (£2.2bn) of capital, much less than expected.

Expectations were for five to 15 banks to fall short with a need to raise €10 billion or more in capital.

“These tests showed a relatively healthy banking sector, something that no reasonable person believes,” said Lex van Dam, hedge fund manager at Hampstead Capital.

“Thus the sector is being sold again because the authorities are clearly still in denial about the seriousness of the current situation.”

Martin Dobson, head of trading at Westhouse Securities, concurred: “The banking stress tests didn't take into account sovereign credit default and I think the real test would come on the banks if there was a default on sovereign debt, so it hasn't really proved anything.”

Further discouragement in the form of an apparent political impasse over raising the US debt ceiling by a 2 August deadline led investors to seek refuge in safe-haven assets, with gold prices hitting record highs above $1,600 an ounce in Europe yesterday.

This risk aversion favoured precious metals miners, with Fresnillo and Randgold Resources the standout FTSE 100 gainers, up 2.1 per cent and 1.7 per cent.

But sector peers missed out on the rally, enduring hefty falls as the demand outlook was clouded by the problems in Europe and the United States.

Man Group shed 4.2 per cent, tracking the steep declines by other financial sector shares, as the hedge fund group said it would take on exposure to the estates of defunct US investment bank Lehman Brothers from funds managed by its subsidiary GLG Partners.

The UK benchmark index ended the session down 90.85 points, or 1.6 per cent, at 5,752.81, its lowest close since June 27 and its third successive day of falls.

The FTSE 100’s 50-day moving average has broken below the 200-day moving average, a bearish technical signal known as “dead cross”.

Sandy Jadeya, chief technical analyst at City Index, said that if the 5,740 support level fails to hold, we could see the June low (5,644.38) also being tested.

Elsewhere among the short list of blue-chip gainers Centrica managed a 0.4-per cent gain as Barclays Capital raised its rating for the energy firm to “overweight” from “underweight”.

Bullish broker sentiment also gave Shire a fillip, up 0.5 per cent, with RBS lifting its rating for the drugmaker to “hold” and hiking its target price.

“We now believe Shire could achieve its aspirational targets through organic growth, commercialisation of its high-risk pipeline and acquisitions,” RBS said in a note.