While a two-day summit in Brussels on 28-29 June was very much the market focus, traders pointed to an element of investor fatigue given it is the 20th time EU leaders have met to try to resolve the debt crisis since it began in Greece in early 2010.
Scepticism that it would result in a positive outcome was also fuelled by Germany’s resistance to the idea of common Eurozone bonds that mutualise debt across the region, perceived by some as the best solution to putting an end to crisis.
German Chancellor Angela Merkel has been quoted as telling a meeting of one of the parties in her coalition that Europe would not have shared total debt liability “as long as I live”.
“Expectations have probably been stretched beyond what is reasonable and achievable if markets are expecting euro zone leaders to agree on debt mutualisation in euro bonds,” Mike Lenhoff, chief strategist at Brewin Dolphin, said.
“Two things will be of interest – the approach to banking integration of some sort and fiscal integration... If put forward in a manner that indicates that these are serious intentions and there’s a timeline associated with it being addressed, then I think the markets could respond well.”
The FTSE 100 ended down 3.69 points, or 0.1 per cent, at 5,446.96, steadying after a three-day sell-off which saw it shed around three per cent, having vacillated between positive and negative territory in a tight 40-point range yesterday.
UK banking stocks came under some pressure, with investor risk appetite subdued, while defensive pharmaceutical and tobacco stocks posted modest gains.
The crisis escalated on Monday when credit rating agency Moody’s downgraded the ratings of 28 Spanish banks after a cut to Spain’s sovereign rating to just above junk status earlier this month.
“We’ve certainly been more cautious about where markets are likely to go on a very short-term view,” Henk Potts, market strategist at Barclays, said.
“On a three- to six-month view, we’ve been telling our clients: ‘Hold more cash then you normally would, be less aggressive in terms of your stance to equity markets, and have a good weighting in terms of government bonds’.”
The anxious mood was made worse by UK public borrowing which came in higher than expected in May as income tax receipts fell and spending rose, in a sign the government may face a struggle to meet its debt reduction target as the economy weakens.
Royal Bank of Scotland, also under pressure to rectify an IT glitch that paralysed its online banking operations last week, fell 3.8 per cent to become the FTSE 100’s biggest faller.
Drugmaker Shire rose to the top of the blue-chip leader board, ahead 3.2 per cent, as a raft of brokers upgraded their ratings on the stock following a sharp sell-off in the previous session.
Shire sank 11.3 per cent on Monday after the unexpected US approval of a new generic version of its Adderall XR attention deficit hyper disorder treatment, produced by Actavis.
Societe Generale and Berenberg both lifted their ratings for Shire to “buy”, whilst Panmure Gordon raised its recommendation to “hold”.
BSkyB was the second biggest riser, up 2.7 per cent, on news that parent company News Corp is considering splitting itself in two.