Stocks fall after the Bundesbank dampens ECB action optimism

In another slow start to a new trading week, continuing in the fashion of last week’s lacklustre sessions, the FTSE 100 lost ground within tight trading ranges, whilst the German DAX and CAC indices both also saw losses of around 0.1% in early trading as the German Bundesbank damped speculation that the ECB could move to buy bonds if the yield spread over German bunds widens excessively.

It is expected to be another week whereby the majority of traders are away from the markets and this is expected to keep volumes on the light side. However, with low volumes there is also the possibility that market moves could spike, should above normal market size trades take place. As such, this element needs to be watched by investors.

Comments from the German Bundesbank this morning that it remained in opposition to the ECB’s plans to intervene in the bond markets saw sentiment turn negative. The ECB is looking to buy bonds in an effort to help contain Spanish and Italian yields from rising to damaging levels, such as the 7% mark, which makes self financing through the debt markets unsustainable. There had been speculation in the press that one of the models the ECB might employ is setting breach levels for intervention from spreads against German bunds and that any buying could be ‘unlimited’. This has firmly been quashed by the Bundesbank this morning, who maintain their opposition to such action.

The comments helped to weigh on the euro, which fell 0.4% against the US dollar in reaction, whilst financials also weighed in trading, though Lloyds Banking Group shares bucked this trend to rally 0.7%.

Most of the early weakness was weighted in the mining sector, which fell 1.2% to provide a heavyweight drag on the UK Index. Eurasian Resources, Xstrata and Kazakhmys all fell around 3% in trading as a result. Whilst the miners tracked a fall in Copper prices, there is also a bit of dampened sentiment concerning potential Chinese monetary stimulus after data showed that Chinese home prices increased.

Shares in Amlin rallied 4.6% after the insurer posted a pretax profit of £184.5m for the first half of the year after a pretax loss of £192m a year ago. The group also said it had agreed a new five year debt facility with its lenders of £300m, after a £250m loan was due to expire in September, giving a double lift to investor confidence.