Equity markets pare losses but investors remain wary

European equity markets pared early morning losses, but traders and investors remain nervous amid continuing tensions in the Middle East and North Africa. The morning trading session started with a violent spike in Crude Oil prices pushing the commodity through the $100 level breach to two-year highs. Equity markets responded inversely, selling off in the face of growing nervousness that escalating tensions in Libya could spread to more oil producing nations.

The FTSE 100 opened lower by 25 points, trading down over 1% within the first half an hour and the Dax traded below 7100 for the first time this month. Risk sensitive banks were the worst hit, with Barclays shedding 1% and HSBA trading down 0.5%. RBS was the worst hit after updating the market on its fourth quarter. Although there seem signs of recovery from the bank, the poor performance from the investment arm and the lack of dividend disappointed patient investors.

Midday reports that Saudi Arabia is in active talks with European oil companies to meet any shortfall from the Libyan fallout seemed to temporarily reassure the markets as brave investors looked for over sold stock as WTI crude drifted back below $100. Traders of BP also had reason to cheer as the company posted a 2% gain on positive comments from their Indian Head re the Reliance deal. Revised Durable Goods numbers from the US mixed with slightly better jobless data provided respite for investors as the Dow future pared early losses.

Fundamentally, sentiment remains deeply cautious and is likely to do so if the situation continues to deteriorate in Libya with the mounting threat of further contagion in the region. Putting the crisis in context, equity markets have rallied impressively since the start of the year, and such uncertainty is a timely opportunity to take profit off the table. However if the geopolitical tensions were to ease, the recent losses may be reflected on as the timely correction the market needed before new heights could be breached.