EU Indices weigh heavily on EU and US debt fears

EU indices traded heavily lower on Wednesday as traders made a concerted move to avert risky asset classes as fears over contagion within eurozone sovereign debt increased and politicians in the US appeared no closer to a deal to raising the US debt ceiling.

We have seen risky asset classes sold off across the board today with a clear escalation in investor uncertainty over both the sovereign debt situation spreading to Italy and also the deadlock in the US between the Republicans and Democrats over how to reign in the burgeoning deficit and raise the debt ceiling. Gold, Swiss Franc, Yen and tobacco firms have all seen positive price sessions, and with all assets being the typical defensive trade plays, this reaffirms the risk off nature towards today’s trading session.

The FTSE 100 was already trading with losses of around 0.2% but it was when the US markets opened that losses in Europe gathered pace. European Indices therefore have closely tracked the 1% fall in the Dow Jones and a 1.5% fall in the S&P, into the European close. Most of today’s European index losses were centred on banking stocks. UK banks Barclays, Lloyds and RBS were the key drags on the UK Index, falling some 4% to 5% on the day, whilst similar falls in banking stocks were seen across Europe. These banking losses were no doubt speeded by a negative note on European banks by US banking giant Goldman Sachs, which downgraded its rating on European banks to neutral from an original stance of overweight.

The dollar strength, boosted by bargain hunting and confidence that despite the risk of a US credit downgrade, the dollar remains the world’s reserve currency locked in weaker metal demand. Strong technical support levels for the US Dollar Index has also supported todays dollars retracement higher. Weaker copper and crude oil prices had negative correlations to the key miners and oil firms on the FTSE 100, which subsequently fell also.  The oil and mining sector fell 1% and 0.6% on the day respectively as a result.