FTSE loses 2 6 as banking crisis looms

The FTSE 100 lost another 2.6% on Tuesday to hit a new eight-week low as the UK Index was dragged down by deep losses in heavyweight mining, banking and insurance stocks as investors sold out of risky stocks on fears of a looming new banking crisis.

In broader European trade, banks Societe Generale, BNP Paribas and Credit Suisse lost 3%-4%, but the deepest losses were focused on Franco-Belgian bank Dexia, whose share lost well over 20% on fears that the bank may require further bailouts by the state.

With speculation increasing that private Greek bondholders may be asked to take a much more deeper haircut to Greek debt than originally expected, a fact emphasised by eurozone finance ministers, investors are being left to second guess how deep this haircut extension may be.

The key here is that the last few months bear all the same hallmarks and signs that preceded the previous banking crisis in 2008 and with the deep losses suffered by major banks across the world still living fresh in the memory of investors today, who can blame investors for selling their bank holdings in the midst of a potential new banking crisis?

Investors typically trade on two fronts, fear or greed, and it’s clear that fear is winning outright at the moment, particularly when it comes to a potential Greek default and the consequential contagion effects that may come at a time when finance ministers continue to shy away from definitive and credible solution to combat the problem.

The FTSE 100 was already trading extremely weakly on Tuesday but with the Dow Jones and S&P opening below key technical support levels, this was enough to drag the FTSE 100 to trade down by nearly 4% on the day in the afternoon.

Bernanke testimony lifts prices from their lows
Words of support from Ben Bernanke were however, enough to trigger a small rally going into the UK close. Bernanke, testifying to Congress, said that the Federal Reserve has tools left to stimulate the economy. He wants to ensure that the economy is getting sufficient stimulus. The Fed Chairman also admitted that the recent Operation Twist was a meaningful but not enormous support to the US economy, opening the window for more sincere easing methods. This encouraged a bit of bargain hunting into the close but make no mistake, today’s investor activity has shown that the clouds are darkening for world stock markets.

Daily price swings have trebled in the last two months
The high investor uncertainty and sensitivity to a global slowdown in growth and a potential banking crisis has contributed to a much more volatile UK stock market over the last two months. The daily price range of the FTSE 100 Index has trebled in the last two months to over 3% as compared to the rest of the year. The wide price swings are evidence of investor unwillingness to hold onto positions for any sincere length of time for fear that the situation may deteriorate and portfolio valuations subside.