FTSE losses tempered somewhat by ECB bond intervention

The FTSE 100 lost 0.28% in trading on Thursday after a very choppy session as investors awaited political developments out of Rome and the ECB continued to intervene in the bond markets to contain Italian yields from rising further.

In a day that saw European indices swing between gains and losses as traders reacted to developments in Athens and Rome, significant intervention from the ECB in buying Italian bonds helped to ease 10-year yields back below the 7% level, calming investors somewhat. That said, question marks remain over the longevity of the ECB’s intervention, given the sizes required if the Italian political fragility continues to wane.

The ECB intervention has however helped to convince of the Central Bank’s determination to stay the course and prevent another sharp rise in Italian yields, whilst the announcement of a new Greek PM, Mr Papandemos, a former ECB Vice-President, and the seeming vigour to move quickly to address Italy’s fragile government by Italian authorities has also helped to prevent another mass sell off in stock markets.

The short term Italian bond auction today progressed somewhat better than expected but in truth still marked a stark escalation in the gross yields paid despite the demand for bonds remaining fairly high. Gross yields rose from an October auction of 3.570% to today’s level of 6.087%, a big increase in such a short space of time and reminds the market just how quickly the crisis has escalated in investor minds.

Understandably with the Italian political crisis still weighing on sentiment and the fact that now French 10-year bond yields have also hit their highest level since July on speculation that the S&P ratings agency could downgrade their outlook for France to negative with a view to a downgrade, traders remain on edge. After the close the S&P clarified the situation however, claiming that their view on France had not changed from a stable outlook.

Indeed, we did see the FTSE 100 sell off around 50 points or 1% in the final two hours of trading with investors unwilling to carry too much risk overnight in case of more negative moves in the US and Asian trading.

Most of today’s losses were weighted evenly in banking and mining firms, two stock sectors typically viewed as risky asset classes. Both the FTSE 350 mining and banking sectors lost just over 1% on the day as a result.

Vedanta Resources was the biggest losing stock, falling 9% after the miner saw a 34% drop in profits to $186.3 million, thanks to losses at its aluminium business and negative currency fluctuations.