FTSE falls 0 45 on profit taking ahead of bond auction

The FTSE 100 fell 0.45% on Wednesday, with heavyweight oil stocks dragging down the UK index as investors reacted to a threat by the Nigerian oil workers’ union to shut down oil production, whilst traders downsized positions in financial stocks ahead of a Spanish and Italian bond auction tomorrow and on Friday.

The FTSE 100 has once again struggled to overcome resistance at the 5700 level and needs to break above the 5800 level sooner or later to keep upward momentum on track or a period of consolidation may ensue.

The situation in Nigeria has weighed on the share price of oil heavyweight Royal Dutch Shell, whose shares lost 3% in afternoon trade and was a key drag on the FTSE 100 as a result. Nigeria’s biggest oil union, PENGASSAN, told its workers to be on red alert in preparation for shutting down production after a dispute with the Federal Government over the removal of a petrol subsidy. This is posing a significant threat to Nigeria’s export of 2 million barrels of crude oil per day. Nigeria is also the fifth largest oil importer to the US and any supply uncertainties usually see a knee jerk reaction in the markets and that is what we have seen today.

This, alongside a move by EDF Energy to cut gas prices from February 7 is also keeping the waters of energy firms fairly turbulent today, as there are fresh fears that this could spark a price war that pressurises profit margins of key energy firms, as price wars often play into the hands of the consumer.

Bond auctions take focus
This is the first bond auctions of the year for both Spain and Italy. Naturally, with both of their respective 10-year bond yields still stubbornly high, and today’s German 5-year bond auction showing just how keen investors are to put their money in safe havens, the Spanish and Italian bond auctions over the next few days will be another test of how market confidence has progressed in the sovereign debt crisis over the last month and how traders are positioning themselves for the start of the new year when it comes to sovereign debt.

Comments from leading figures in the eurozone crisis have kept a cautious edge on trading today. Angela Merkel said in a press conference with Italian PM Mario Monti that Germany would be prepared to pay more capital into the ESM, the permanent bailout fund, at the start in order to give a message to the markets. This temporarily lifted stocks from their daily lows but was short lived.

At the same time, comments from David Riley, the head of sovereign ratings agency Fitch, that the ECB should ramp up its buying of troubled euro debt to help prevent a ‘cataclysmic’ collapse of the euro also met with a cautious reaction from investors.

German bond auction sees average yields below 1% for the first time
The German 5-year bond auction today (BOBL) met stronger demand from investors who were also willing to receive an average yield of 0.9%, the first time under 1% for yields. This emphasised the market confidence in Germany as one of the few safe havens of the eurozone, despite the crisis. Whilst fears continue that an escalation in the sovereign debt crisis could reduce German activity also, today’s auction shows investors are still more than willing to lend to the country, who also saw an annual GDP for 2011 of 3%, in line with expectations, falling back from 3.6%.

The sceptic in me sees this German bond auction as yet more evidence that in the long term investors continue to demand less and less of a return for their cash in exchange for safety, and this may threaten the longevity of cash in equities over the course of the year, and maintain the short term nature to which trading has exemplified of late.