FTSE ends in the red based on soaring Italian debt costs

BRITAIN’S blue-chip share index fell yesterday as political turmoil in Italy sparked fears the Eurozone’s largest debtor may fail to deliver much-needed economic reforms.

The FTSE 100 ended down 16.34 points, or 0.3 per cent, to 5,510.82, with banks weighing the most as investors positioned for months of continued uncertainty on the euro front and declining economic prospects.

Italy’s prime minister, Silvio Berlusconi, struggled to hold a crumbling coalition together ahead of a confidence vote today.

Reports of Berlusconi’s imminent resignation had pulled the market off lows in morning trade, as investors hoped a new government could implement urgent measures aimed at reducing government debt and spurring growth.

Berlusconi’s refusal to step down raised the prospect of a political impasse, sending benchmark Italian government bond yields to 14-year highs, close to levels seen as unsustainable.

Meanwhile, Greece was fast-tracking its hunt for a new prime minister, to appease markets and satisfy EU calls for a speedy resolution of its political crisis. Lucas Papademos, a former deputy head of the European Central Bank, was tipped as the most likely successor to George Papandreou.

“Following an irrelevant G20 summit and the yo-yoing in Greece, the pillars of the EU summit are starting to crack as each requires a level of patience from the market that is just not there,” said Robert Quinn, chief strategist at Standard & Poor’s Capital IQ.

“Even if stocks move a lot on political decisions, I am still negative on equities. We are probably in recession starting in the fourth quarter as the business cycle downturn has yet to trough.”

“What we have seen throughout the day is buyers of back-end vol, so longer-dated volatility,” he said, suggesting a lack of confidence further out.

“They are not confident at all. I think there are a lot of shorts in the market and people are buying volatility in the longer months now. Gambling on the market going down,” he said, citing action out to December 2012 “although there has not been a mass of action”.

Volumes were low, with the FTSE trading at 76 per cent of its 90-day-average.

ICAP was a notable exception, recording volumes more than double its three-month average to close 3.5 per cent higher. The money broker rebounded after dropping 5 per cent on Friday and 30 per cent since the end of June.

Pumps maker Weir, which also recorded strong volumes, dropped 3.7 per cent despite a solid interim statement, as profit-takers cashed in on a 40 per cent rally since the start of October.

Meanwhile European stocks fell yesterday in choppy trading driven by political turmoil in Italy, where bond yields hit euro-era highs, though equities pared losses on hopes Italian Prime Minister Silvio Berlusconi was about to resign.

The FTSEurofirst 300 index of top European shares fell 0.6 per cent to close at 974.66 points, having been down almost 2 per cent in early trade. Volume was light, at 87 per cent of the 90-day average. Financial stocks were down, with the STOXX Europe 600 Banking Index down 0.9 per cent.