The FTSE kicked off in negative territory as investors fear that Europe’s woes may derail the global economic recovery.
‘We face a problem of low growth or no growth in 2011 due to fiscal problems in European countries,’ said Philipp Musil of Semper Constantia Privatbank. ‘A deflation scenario is really possible, which is very toxic for the equity market. We have reduced our exposure to European equities to neutral.’
On Friday US stocks ended the session at a four-year low, after the non-farm payroll figures showed a sizeable slowdown in US private sector job growth, suggesting companies were reluctant to hire as a result of escalating tensions in the eurozone region.
The US economic recovery is trade driven, meaning the country must rely on robust business spending to heal. As businesses hire, consumer spending starts to increase, leading to a virtuous cycle. But Europe’s debt woes have clearly begun to threaten this cycle, forcing up the value of the currency but at the cost of rendering the country’s exports relatively less competitive. The euro has fallen close to 7% against the US dollar over the past month and nearly 20% over a six month period.
The problem with a trade based recovery is that someone has to be strong enough to continue importing your products and to be quite frank we are running out of options here; the situation in Europe is deteriorating week by week and Asian economies are beginning to show signs of overheating, so who will lead a global economic recovery?
Speculation about a potential default on Hungary’s government debt also weighed on stock market sentiment today. Banks were also in focus, as the G20 meeting over the weekend scrapped plans for a coordinated banking sector levy, meaning countries will now have to come up with their own banking sector levies, if any. Meanwhile, the FT has reported that UK Chancellor George Osborne is expected to press ahead with plans for a domestic banking sector tax in his Budget on 22 June.
Banks were also hit by rumours of a new regulatory stress test that aims to examine how the sector would fare in case a eurozone member (or several eurozone countries) had to default on their debt.
Shares of Barclays slumped as much as 4.2% to 276.35p earlier today while Lloyds Banking Group and Royal Bank of Scotland tumbled as much as 4.6% to 52.88p and 4.8% to 41.4p. Banks managed to pare earlier losses by late morning, nevertheless.
Fears of a slowdown in the global economic recovery knocked miners and commodity prices lower as well today. Sector losses ranged from 0.2% to 2% so far. Meanwhile, July high-grade copper traded around 1% lower at $2.792 per pound while July platinum and palladium futures sank 1% and 1.4% respectively.
Bucking the negative trend was BP, however. The energy major climbed 2.3% to 443.5p this morning after capturing more of the oil spewing into the Gulf of Mexico from its damaged well.
Chloride Group was also higher, up 1.3% to 289.7p on talk that Emerson Electric, the US electrical products maker, is planning to raise its takeover offer for the UK company.
By 11:30am (London time) the FTSE 100 was trading 24.47 points (-0.48%) lower at 5101.53 while the FTSE 250 retreated 74.55 points (-0.78%) to 9525.30. At the same time, US Dow and S&P 500 futures pared earlier losses to trade a notch higher, suggesting we may see a rebound on Wall Street this afternoon. There are no major economic announcements due out later today.
