Growing talk of secession in Spain’s Catalonia region, a sharp fall in the country’s GDP, clashes at an anti-austerity protest in Greece and news that Greece's international lenders faced increased tension over how to resolve Athens’z debt crisis all led investors to sell.
The FTSE 100 index finished 91.62 points, or 1.6 per cent, lower at 5,768.09, the lowest close since early September. The index suffered its biggest one-day fall in two months. Charts showed that more declines were likely.
“Investors are worried that although central banks around the world have announced more or less unlimited money printing plans, it’s not actually gaining traction. This is possibly keeping government bonds out of trouble, but not stimulating growth,” said Felicity Smith, fund manager at Bedlam Asset Management, which manages about $700m.
“There are also worries that the European Central Bank’s willingness to buy bonds is dependent on countries like Spain actually asking for help. And so far they have shown reluctance to do so as they know that any request for aid will bring another round of austerity.”
As protesters stepped up anti-austerity demonstrations, Spanish Prime Minister Mariano Rajoy prepares to present more painful economic reforms and a tough 2013 budget on Thursday to show that he is trying his best to contain the debt crisis.
Analysts said that continuing problems in Europe, poor progress in US economic recovery and a slowdown in China - the world's second-biggest economy and a major commodity consumer, had been preventing the global economy from gaining momentum, hurting growth-linked equity sectors such as banks and miners.
The UK mining index fell 2.8 per cent, banks were down 2.7 per cent and the oil and gas sector was off 1.5 per cent. Stocks such as Lloyds , Barclays, BP and Rio Tinto fell 1.7 to 4.2 per cent.
“We are now entering the phase where we are dealing with the tangibles and the intangibles. The intangibles relate to the stimulus and questions are being asked whether this should have the desired effect. Whereas the tangibles relate to the stalling economies and higher incidence of profit warnings,” Paul Kavanagh, chairman and partner at Killik Capital, said.
“I believe the markets will become more emotive over the next few weeks which should increase volatility rather than overall direction of financial markets.”
Charts showed that the FTSE 100 failed to breach the 5,940 resistance area and has entered a correction phase.
Dmytro Bondar, analyst at RBS, said the index had broken several key pivot points including the 50-day moving average and a 23.6 per cent retracement from the June-September extremes, suggesting there would be more downside towards 5,690-5,670 – the area of the 38.2 per cent retracement and its 200-day moving average.
Analysts said investors had become cautious on high beta stocks – a measure of a stock’s volatility in relation to the market as a whole – such as banks, which recorded strong gains recently, but their earnings prospects had not improved.