FTSE falls near 2% as investors avert risk

<p>The FTSE 100 fell nearly 2% on Tuesday into the close to hit a new four week low and broke below the 5800 level as […]</p>

The FTSE 100 fell nearly 2% on Tuesday into the close to hit a new four week low and broke below the 5800 level as risk aversion weighed on heavyweight stock sectors in Europe on concerns over the looming Greek PSI deadline and a slowdown in global growth.

The FTSE 100 has suffered its worst daily performance since 14th December 2011, with investors attempting to diversify their risk by selling out of heavyweight mining, oil and banking stocks throughout the day. At the same time, the FTSE Volatility Index, a gauge of investor fear or pessimism in the market, rallied 20% to reach a new seven-week high, which escalates concerns that equities are verging on correction mode.

The Private Sector Involvement (PSI) in the Greek debt swap seems to be progressing slowly, with only 20% of the swap taken up thus far and with a March 8th deadline looming, this is raising a concern in the markets that the participation levels may be much weaker than expected.

At the same time, the last few sessions has seen important economic data largely disappoint, with US factory orders and UK services data both missing targets yesterday whilst this morning we have seen a confirmation of the fact that the eurozone economy contract 0.3% in Q4, albeit in line with expectations.

With US jobs data out later this week and the cut in Chinese growth targets yesterday, investors have been enticed into protecting their gains and this is weighing on stock markets across Europe today.

This risk aversion has seen higher demand for what is typically seen as defensive asset classes such as the US dollar, utilities and to a lesser extent, pharmaceutical stocks, with investors attempting to diversify their risk.

FTSE 100 in correction mode?
The FTSE 100 has now lost 3.4% from its recent highs and its failure to break through psychological resistance at the 6000 level recently has enticed investors into downsizing risk and fearing a correction in prices.

With both the Dow Jones and S+P both also now selling off from their own psychological resistance levels, this is convincing that a potential correction of 5%-10% in UK stocks could be due. A small price correction is nothing to fear and can be helpful in maintaining the near term bullish momentum in stock markets if it can attract bargain hunters, who may be enticed to buy stocks at what they perceive to be cheaper levels.

That said, the timing of the recent falls in the FTSE 100 is somewhat coincidental, given that at this time last year having surpassed the 6000 level, the UK index then proceeded to fall nearly 8% in the space of a week to trade back towards the 5600 level. In this sense, traders should be mindful of history repeating itself and indeed a close below the 5600 level this week could open the door for more losses unless we start to see bargain hunters emerge.

Much of the FTSE’s near 2% losses today have been focused on selling in the three heavyweight stock sectors; the miners, oil firms and banking stocks, with all three respective FTSE 350 sectors losing between 2%-3%.

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