FTSE loses 0 65 following US session losses

The FTSE 100 lost 0.65% in trading on Friday as investors in London reacted to sharp losses in US trading overnight – where the Dow Jones lost 250 pts – and Moody’s downgraded their ratings on 15 global banks including UK based Barclays, Lloyds and Royal Bank of Scotland.

In truth the Moody’s move was already well leaked and so the reaction to this announcement has been minimal, with the UK banking sector in fact outperforming the broader FTSE losses. Moody’s cut their ratings on 15 banks by between one and three notches, with Morgan Stanley’s and Barclays rating losing two notches and UBS losing three. HSBC and RBS lost one notch.

US losses highlight potential correction
The sharp losses in the US however hints towards a looming correction following a sharp 7% rally this month in US stocks from the lows reached on 4 June and it is here where European stock indices are taking their lead today.

The headlines will preach a story of global growth concerns but what we have seen this week in truth is Central Banks react in much of the way many investors had expected, with the Fed extending Operation Twist and the Bank of England expected to increase asset purchases early next month by between £25bn and £50bn. With these factors being a key engine in driving equities higher recently from early June and now having seen rumours turn into facts, investors are quite happy to lock in their gains and reduce exposure.

Defensive sector gains
Today we have seen the FTSE 350 pharmaceutical sector – a defensive sector – as one of only two stock sectors (alongside UK banks) to trade in positive territory, and so clearly investors are diversifying their portfolio’s today ahead of the weekend break.

Spanish bank stress tests
Interestingly enough we have also seen a somewhat positive reaction to the announcement after the close yesterday of the first phase of Spanish bank stress tests, which indicated that Spanish banks may need to raise as much as €62bn under stressed scenarios, some way short of the €100bn Spain can access for bailout funds.

The Spanish IBEX has outperformed broader European Indices to rally as much as 1% in trading so far, led in part by solid gains in Spanish banks such as BBVA and Banco Santander.

The fact we also have seen Spanish benchmark 10-year bond yields cool to 6.7% has also helped ease trader unease this week having traded above 7% earlier this week.

That said and despite the initial positive reaction, some caution is warranted as the second phase of Spanish bank stress tests is not due now until September having been delayed from an initially scheduled release in July for further examination.