European markets fall as Crude Oil spikes on Libya unrest

European equities fell on Tuesday dragging down The FTSE 100, DAX and CAC between 0.5% and 1.4% respectively as traders sought defensive safe havens such as the US dollar and left risky asset classes such as mining and banking equities.

The reaction in the financial markets is a reaction of uncertainty over how the situation in the Middle East is likely to play out and what the consequences will be for supplies of crude oil. The spikes in crude oil are likely to inflate company costs, particularly those of airlines and as such pressurize profit margins. Whilst there is every chance that these heightened costs could be passed over to the consumer, for now investor’s fear that the unrest in Libya and other nations in the region could impact corporate profits at least in the short term.

Take one look at the FTSE Volatility Index, which has spiked higher by 35% in just two days, and this emphasises the uncertainty there is in the market over the situation in the Middle East.

The situation, as proved by the reaction in the markets over the last few days, can turn very quickly, both in terms of a further escalation or in terms of fears receding.

Traders just want to see clarity. The ‘unknown’ is one of the key elements feeding trader pessimism at the moment and so any clarity on which way the situation in region and specifically Libya or other nations could turn will be helpful for traders. Part of the ease in which traders digested the scenes in Tahrir square was down the fact that not only was the situation largely peaceful, but there was also a sense of inevitability that President Mubarak would step down. There is no sense of this currently in Libya and with the crisis seemingly deepening over the last few days as news outlets report mass bloodshed, this is making the likely result even less transparent. It is this unknown that is feeding the falls in equities and the spikes in Crude Oil.

The FTSE 100 has traded through support levels of 5950 today and should the UK Index close below this level today, it could open up further downside pressures to the next support levels of 5824.