Insurers drag FTSE lower on Japanese exposure fears

Insurance firms were the key drag on European Indices for a second consecutive session on Monday with the sector losing over 1% in early trading and bringing the UK’s benchmark index lower with it by 20 points within the first 30 minutes of trading.

Naturally traders maintain a definitive eye on the situation on Japan, where the terrible consequences of both the earthquake and subsequent tsunami has left a devastating effect on infrastructure and loss of life. The world’s financial markets have responded to last week’s events with traders trying to second guess the effects of the tsunami on demand for both materials, insurance liabilities and currencies. The Nikkei, Japan’s benchmark Index, falling some 6% this morning and suffering its worst trading day for over 2 years is likely to keep traders on edge somewhat.

Insurance firms such as Standard Life, Aviva and RSA Insurance Group have weighed on concerns of underlying exposures to potentially huge liabilities to the Japanese region, with early costs estimates going into the billions for the cleanup and redevelopment needed. A statement from risk modelling firm AIR Worldwide who said that the cost of the quake could be as much as $35bn before one starts to factor into the cost of the tsunami, has also contributed to the negative sentiment surrounding insurers. We have also seen traders buy Yen against the US dollar, with the dollar/yen cross rate reaching its lowest level since the 9th November last year, as traders speculated a likely increase in demand for the Japanese currency from insurance liability payouts and construction.

Traders are also likely to keep an eye on Libya and events in the Middle East where protests continue in Bahrain and Saudi Arabia. The price of crude oil has retraced somewhat over the last few days with Nymex Crude for April trading below the psychologically important $100. Japan is the world’s third largest consumer of oil and so with the region likely to take some time to return to stability and a sense of normality, traders have been selling crude oil on expectations of lower demand.

In terms of the individual stock movers in Europe today, we have seen shares of Aggreko rally to the top of the FTSE’s leader board, rising 4%, whilst shares of BG Group have also rallied 3%. Shares of luxury goods provider Burberry have however slumped over 5% in early trading on demand fears after Japan’s earthquake.