FTSE falls 2 as risk aversion gathers pace

The FTSE 100 fell 2% on Wednesday as investors averted risky asset classes such as financial and mining stocks after continued fears over rising sovereign bond yields and nerves over potential ratings downgrades for France convinced investors to cut the amount of risky assets they held in their portfolios.

There has been speculation and concern over the fragility of top notch credit tratings in Europe for much of the week given the fact that ratings agencies put such a large emphasise on the EU Summit to help deliver hard solutions that may help Triple AAA sovereigns in retaining their top notch ratings. Unfortunately, the EU Summit failed to convince many investors and credit ratings agencies it seems that those hard solutions are going to be delivered, and so as such, investors are on high alert for potential credit ratings downgrades, particularly to that of France. A cut in rating for France could have immediate consequences that may significantly hurt market sentiment and confidence further.

It is this high alert that is convincing many investors to off load risky asset classes in a defensive move, and this has triggered big weakness in financial, oil and mining stocks today as a result.

Fresnillo, Essar Energy and Randgold Resources all fell between 6% and 11% on the day, with the latter firm Randgold suffering from correlated weakness in the price of Gold, which suffered its biggest one day fall in nearly three months today.

The FTSE 100 has now had five straight days of lower highs and lower lows indicating that the FTSE is in a near term bearish trend. However it is nearing short term support levels and a failure to remain above the 5300 level could indicate that the UK index may trade with a bearish tone for the year end.

The 5-year Italian bond auction this morning saw yet more record euro era highs in yields paid, keeping the cost of borrowing for Italy very high, whilst 10-year Italian bond yields also hit back above the unsustainable 7% level today, rising a massive 50 basis points in the process. Moves in bond markets continue to emphasise the tensions that exist in equity markets right now.

Weakness in UK retail stocks today, triggered mostly by negative notes from several brokers, will continue to be in focus tomorrow with the latest release of UK retail sales, which is expected to show yet another slowdown in high street activity.