First fall in 9 sessions for FTSE 100 on banking weakness

A sell off in key UK banks forced the FTSE 100 lower for the first session in nine days after Moody’s cut its credit rating on Portugal to ‘junk’ status, and ahead of a meeting in Paris for leading European banks and insurers on how they can shoulder the Greek debt burden.

Moody’s Portugal downgrade is no surprise but does hit a nerve
The Moody’s downgrade of Portugal is no surprise in truth but has hit a nerve in investors who have existing concerns regarding a potential escalation of sovereign debt issues outside of Greece into the wider eurozone. Portugal’s debt problems are well known by market players but it does of course raise the issue of contagion of sovereign debt within the eurozone. What has lingered in terms of sentiment however, is the caution from Moody’s that Portugal may require a second bailout on fears that the country may not be able to meet deficit reduction targets. With investors already sensitive over the potential for a second bailout for Greece, warnings of a potential requirement for a second one for Portugal of course raises concerns that Ireland, the other eurozone country to receive a bailout, may closely follow suit.

The Moody’s announcement came after the European close yesterday and so equity investors have only had the chance to react to this today. The euro has already seen declines from last night in reaction to the ratings cut and these falls have continued today, with the euro trading at $1.4350 against the US dollar.

It is the equity markets of peripheral states within the eurozone and so called PIIGS nations that have been hit the hardest today, as one might expect, with the Thomson Reuters Peripheral Index falling 2.5%. The Portuguese Index, the PSI, has fallen 2% in early trading on heavy volumes having hit a new three-week high on Monday, closely followed by the Italian Mib and Spanish Ibex, which have both fallen 1.8% and 1.5% respectively.

A much stronger reading than expected of German Factory Orders did however provide some relief for euity markets mid morning. German Factory Orders rose 1.8% when a decline of 0.5% was expected by the market. This was a bit of a surprise and reaffirms the contention that German economic strength continues to lead the way for the eurozone.

There is a lack of significant economic data due out today and so investors have been comfortable removing some tablets of risk from their portfolios in reaction to the Moody’s line and the meeting for European banks in Paris. There has also been a fair amount of investors positioning themselves for tomorrow’s ECB and BoE rate decisions, ADP employment report and Friday’s non-farm payrolls.