European indices lifted from lows but traders still cautious

The FTSE 100 and other key European indices such as the DAX andCAC all traded in positive territory between 0.4% and 0.6%, helped by bargain hunting in the key miners and oil stocks.

Oil and miners are the two sectors helping to lead the charge higher for the UK index, mostly on the back of the heavy falls suffered by both sectors over the last 48 hours. Since Friday, the oil and mining sectors have lost between 4% and 5%. So naturally, with commodity prices gaining today, these two sectors have seen some short-term buying but sentiment remains rather clouded as to the longer term aspirations of the buy trades we have seen.

The fact that the FTSE 100 touched a new two-month low and broke below support levels of 5860 yesterday however, shows that sentiment has turned weak in the midst of stricter banking regulation, sovereign debt concerns and a receding risk appetite. The fact that the US Dollar Index touched a new seven-week high yesterday, and with gold prices climbing for three straight sessions, merely emphasises that appetite for risky asset classes such as stocks has receded of late with investors unwilling to add too much risk to their portfolios.

Airline stocks have been hit today with International Consolidated Airlines Group (ICAG) shares falling 2%, with investors concerned once more about the potential impact on revenues from the new volcanic ash cloud. It’s a sense of de ja vu with the Icelandic ash cloud and with airline stocks being hit hard last time around, naturally investors in airlines are being fairly cautious with the new situation in case it’s a similar scenario.

Moody’s warns UK banks they are at risk of a downgrade
UK banks have lost 0.5% in trading as investors reacted to sentiment from ratings agency Moody’s, which said that UK banks are at risk of a downgrade with there now being a lack of support for further bail outs from the UK authorities. In truth, the line from Moody’s is of no real surprise and considering the amount of restructuring UK banks have already and will been forced to undertake in the aftermath of the global banking crisis, one would hope we would never get to a stage where a major UK bank requires a bailout again. Indeed the line from Moody’s that there had been no indication of a weakening in government or banking finances merely emphasises the point that today’s warning in truth may not mean that much at all.

There is however real cause for concern in terms of near- to medium-term outlooks for UK banks given the fragility of the European sovereign debt situation and the prospect of stricter regulation to come in terms of the recommendations set out by the Independent Commission on Banking (ICB).

Greece debt continues to dampen sentiment
The Greece issue remains unresolved despite yesterday’s outline of further austerity to help slow the speed at which the indebted nation approaches a debt default. Greece maintained a dedication to cut its budget by another 2.8% of GDP and speed up privatisations in an effort to preserve cash.

However, the market remains far from certain that Greece will be able to meet its debt liabilities without help from the EU, IMF or private bondholders. Moody’s line that a Greek default would hurt other peripheral eurozone states has switched traders attention quickly to Portugal, Italy and potentially most importantly, to Spain to see what the knock on effects could be.

Without any debt repayment road map or consensus between the EU,IMF and Greece, the markets are awash with uncertainty towards the debt situation and this is why despite the small index and Euro gains seen in today’s trade, investors are unwilling to take on too much risk until the dark clouds of uncertainty have dissipated.