Banks weigh on FTSE 100 as Italian/Spanish yields rise

<p>More turbulence in European bond markets weighed on the FTSE 100 today, forcing banks lower and triggering a 1% drop in the UK Index. With […]</p>

More turbulence in European bond markets weighed on the FTSE 100 today, forcing banks lower and triggering a 1% drop in the UK Index.

With Italian 10-year bond yields racing back above the important 7% level again and Spanish 10-year bond yields pushing higher to 6.3%, this is heightening concerns that despite the political in-roads that have been made last week in Rome, the crisis remains at a point of escalation.

The escalatory moves in bond markets is convincing investors to shy away from risky asset classes and stocks which have particular exposures to sovereign debt, be it directly or indirectly. This is why much of today’s weakness is concentrated in the banks and insurance firms, with both sectors falling around 2% in trading and stock such as Barclays, Lloyds Banking Group and Royal Bank of Scotland the key drags on the FTSE 100 as a result.

As soon as Italian 10-year bond yields traded back above the 7% level, we saw a fresh selling wave hit the FTSE 100 and this was enough to push the UK index lower by 1% in trading, weighed by banks and insurance stock losses.

The feeling I get from investors right now is that with so much still at stake in the sovereign debt crisis, which is seemingly at the gates of Madrid now as much as entrenched inside the walls of Rome, investors are happy to sit on their cash and what cash that is at play is being invested into low risk asset classes.

The 7% push higher in the price of gold over the last three weeks where, for the same period the FTSE 100 has remained fairly flat, cements the view that free cash is not being invested into stocks at present and this means that the FTSE 100 sides with a negative bias at present, particularly with Italian and Spanish yields racing higher.

UK inflation dips to 5%
UK inflation eased slightly more than expected last month to 5% from 5.2% in September, helping to ease pressure on the Bank of England to rein in inflation and helps cement the view that inflation may have peaked. Whilst Mervyn King may well view today’s inflation figures as a welcome justification for the Central Bank’s stance in reigniting the quantitative easing flames, we are likely to learn much more about the likely path of inflation with the release of the Quarterly Inflation Report tomorrow.

Burberry shares lose 5% after update
Shares in luxury goods maker Burberry lost 5% after the firm reported figures which fell broadly in line with market expectations. Burberry posted a profit before tax and one-off items of £162 million, a rise of 26%. The goods maker also maintained its full-year forecasts but shares dropped as investors decided to lock in their profits after a strong run that saw the firm’s shares rally 35% from the lows of October.

EasyJet shares dip 2% but pay dividend
Shares in budget carrier easyJet dipped 2% in trading after the airline reported a 31.5% rise in full-year profit and announced its first ever dividend. The firm revealed a special dividend of 34.9p, which comes on top of an ordinary dividend of 10.5p, resulting in a payout to shareholders of £195 million. Shares had been trading near the top of a six-month trading range as the dividend was no real surprise and today’s fall in shares is not being seen as a dramatic bearish reversal in share prices just yet considering the robustness of today’s figures.

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