FTSE falls as Italy’s bond sale reduces investor confidence

BRITAIN’S top shares fell yesterday as the latest Italian bond auction dented investor confidence in the ability of new governments in Italy and Greece to tackle Europe’s debt crisis.

An Italian five-year government bond auction delivered an early market view on former European Commissioner Mario Monti’s leadership after he was installed as Prime Minister of Italy on Sunday in the wake of Silvio Berlusconis resignation.

While the auction was well covered, the record yield of 6.29 per cent cast doubt on the long-term financing of the country.

German Chancellor Angela Merkel said that Europe could be living through its toughest hour since World War Two as new leaders in Italy and Greece rushed to form governments and limit the damage from the Euro zone debt crisis.

“Short-term, I suppose [the change in political leadership] is good in terms of sentiment, but not enough to calm market nerves,” said Henk Potts, market strategist at Barclays Wealth.

“There are still fundamental questions that need to be resolved, including how to stimulate growth within the Eurozone, and I suppose that the roadmap is towards fiscal union, which you have to believe is the final destination.”

Supporting expectations of a sharp contraction of output and a probable economic recession, industrial production in the Eurozone posted its bigged monthly fall since February 2009.

The UK benchmark closed 26.34 points, or 0.5 per cent, lower at 5,519.04, led down by banks and miners as investors dumped riskier assets.

Trading volumes sagged, with the FTSE 100 at only 71 per cent of its 90-day daily average.

“There’s not an awful lot that’s really providing stimulus for people to actually start trading again. They want to see austerity packages put into practice rather than talked about,” said Martin Dobson, head of trading at Westhouse Securities.

Barclays shed 2.7 per cent as Goldman Sachs cut its rating on the stock to “sell” from “neutral” on expectations would de dealt the biggest blow by reforms from the Independent Commission on Banking.

Goldman said that while the ICB estimated the annual pre-tax costs of reform for UK banks at £4-7bn, it reckoned all-in costs at £10bn.

ITV topped the leader board, up 3.3 per cent after Britain’s biggest free-to-air commercial broadcaster said it expects to outperform the wider television advertising market in 2011 after a better than expected third quarter trading update.

Luxury goods group Burberry, ahead of first-half results today, took second place on the risers’ list, up 3.2 per cent.

And a broker upgrade helped lift medical products company Smith & Nephew by 2.6 per cent. Exane BNP Paribas switched its rating on the stock to “outperform” from “neutral”. The stock has underperformed by 20 per cent in the year-to-date.

Meanwhile European shares also fell – dented by Italy paying euro-era high price to sell itsfive-year bonds.

Italian banks, exposed to the country’s sovereign debt, were among the biggest fallers, having been strong gainers on Friday in anticipation of Silvio Berlusconi’s exit as Prime Minister.

Intesa SanPaolo and UniCredit fell 4.1 and 6.2 per cent respectively. Investors were also absorbing UniCredit’s third-quarter loss and plans for a €7.5bn capital increase.