The rally on the FTSE stalled this morning following fresh concerns about Greece’s debt. Fears over China’s economy overheating and expectations of tighter UK banking sector regulation also weighed on the market today.
By 10:50am (London time), the FTSE 100 was trading at 0.54 points (+0.01%) higher at 5645.17, while the broader FTSE 250 was 23.52 points (+0.24%) above its previous close at 10032.02.
Standard & Poors recently affirmed Greece’s BBB+ credit rating and removed it off its ‘Creditwatch Negative’ list giving the market the impression that the worst was over – but it seems that is not the case.
Today we’re seeing reports claiming that Greece may have to seek financial aid from the International Monetary Fund over the Easter period if no detail rescue plans are released soon - essentially Greece feels that it cannot count on its eurozone partners to provide timely aid!
‘We still want a solution within the European Union, but it doesn't look good,’ an anonymous senior Greek official told Dow Jones. ‘If there is no clear support at the EU summit on March 25, we will have to decide where to go next…’There are a number of scenarios on the table, but the most prominent one is the IMF.’ The official also said the disagreement with Germany, Europe's biggest economy, over the debt crisis was deepening .
Meanwhile, on Wednesday, the European Commission warned that economic growth forecasts for Germany, France, Italy and Spain, the largest economies in the eurozone, were too optimistic. The EC also asked the countries and others including Austria, Belgium, Ireland and the Netherlands to provide precise details of how they intend to lower their deficits to meet its 3% of GDP medium-term target.
Uncertainty over the Chinese economy also weighed on sentiment. On Wednesday, the World Bank raised China’s growth forecast for 2010 from 9% to 9.5% but urged it to raise interest rates in order to avoid a domestic property bubble and to allow the yuan to strengthen. It stands to reason that if China raises interest rates then construction activity would slow – and that is likely to weigh on global commodity demand.
Unsurprisingly these fears were responsible for pushing the FTSE miners in the red this morning. The sector’s worst performers were Eurasian, Fresnillo and Kazakhmys, down between 1.3% and 1.4%.
UK banks were also in the red, with Royal Bank of Scotland down 2.3% to 42.53p after saying that its pension deficit surged 46% to £2.91 billion last year. It also warned that it may experience ‘increasing’ deficits – the bank may decide to service this liability using cash, which would weigh on future profitability, or decide to raise more capital. The bank also said that a cut in the UK’s sovereign debt rating may have repercussions on the bank, and that it engaged in contingency planning to mitigate the impact.
HSBC, Barclays and Lloyds traded between 1% and 1.4% lower as well this morning due to uncertainty over banking sector regulation. It transpires that the Financial Services Authority is planning to rev up banking supervision and introduce tougher restrictions on financial institutions. The fear at this juncture is that tougher regulations would eventually lead to the breaking up of banks and diminished profitability.
Pharmaceutical companies were in demand, however, with GlaxoSmithKline up 2.6% to 1256p after Novartis handed back the US rights to a drug widely believed to be a generic copy of its blockbuster drug Advair. Peers AstraZeneca and Shire gained 1% and 0.4% respectively.
Looking ahead, the March Dow and S&P 500 futures traded marginally lower, suggesting that Wall Street is likely to kick off in negative territory this afternoon. Investors should keep an eye out for the US consumer price index, jobless claims, and current account data, all due at 12:30pm (London time). The US leading indicators and Philadelphia Fed manufacturing figures will follow at 2pm.
