London’s blue chip index fell 140.34 points, or 2.6 per cent to 5,222.60 yesterday, its sixth straight day of losses and adding to the previous week's drop of 3.3 per cent, with analysts warning of potential for further downside.
“If the index fails to hold on to the 5,200-5,175 level, the 5,000 level is probably where the index is going to aim for,” a London-based trader said.
He said to remove the current bearish play the index would require a move above 5,445 and also 5,510, but also noted a sideways channel is still in play with the key low at 4,868 remaining.
In evidence of heightened anxiety among investors, the FTSE 100 volatility index rose 8.1 per cent.
Not even a new government in Spain could soothe market fears over debt contagion within the Eurozone.
Spain’s Socialists became the fifth government in the 17-nation single currency area to be toppled by the debt crisis this year. Portugal, Ireland, Italy and Greece went before.
Instability in the region and lack of a cohesive strategy from politicians has sparked panic in markets, pulling equities lower and driving bond yields higher.
The threat of weak growth in the region and high interest rates prompted ratings agency Moody’s to warn on France’s stellar credit rating.
Richard Jeffrey, chief investment officer at Cazenove Capital Management, said that with rising yields a major concern investors should keep a close eye on upcoming bond auctions.
“The moment you have a failed bond auction the whole system begins to implode,” he said.
Jeffrey advised investors to be risk averse when it came to picking assets, but said there was a danger in being too risk averse in case there was a sudden rush to buy cyclicals.
Miners, which have lost more than a quarter of their value in 2011, led the FTSE 100 lower again as the murky outlook for demand weighed on metals prices.
Adding to the grim forecasts, US plans to combat its debt were sent into disarray, sparking fears over growth prospects for the world’s largest economy and, in turn, the global economy.
Also, Chinese Vice Premier Wang Qishan warned a long-term global recession was certain and China must focus on domestic problems, delivering a fresh blow to European leaders hoping China would help the Eurozone combat its debt crisis.
Credit Suisse said in a note: “We seem to have entered the last days of the euro as we currently know it.”
“Some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the Eurozone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”
FTSE banks fell sharply with Royal Bank of Scotland down 4.9 per cent after Espirito Santo cut its rating on the part state-owned lender to “neutral” from “buy” and slashed its target price to 22 pence from 51 pence.
Worries remained over the leadership at Lloyds, down 7 per cent, after chief executive Antonio Horta-Osorio’s return from sick leave was delayed.