UK & EU Market Commentary: FTSE falls 2.6% as global debt fears grow

<p>Investors started the new trading week heavily on the back foot today, downsizing their holdings in heavyweight banks and mining firms and seeking to minimise […]</p>

Investors started the new trading week heavily on the back foot today, downsizing their holdings in heavyweight banks and mining firms and seeking to minimise the amount of risk in their portfolios with no end in sight to the debt crisis. As a result, the FTSE 100 fell 2.6%, and is on its lows for the day.

It’s been a dreadful start to the week’s trade and investors have made a concerted effort today to minimise the amount of risk in their portfolios. That means reducing their holdings in key banking and mining shares, and recycling funds into safer haven asset classes such as German Bunds and UK Gilts.

With such little movement made in Europe to convince investors that the debt crisis in Italy and Spain can be contained, and seeming deadlock in the US within a super committee expected to outline plans to cut the US deficit, who can blame investors for protecting their capital today.

The speculation emanating out of the US that the Republican and Democrat members of a super committee have failed to see common ground on how the US should cut its deficit is wholly unwelcome. But then again, considering how long it took the two parties to come together over the terms of agreeing to raise the debt ceiling in the summer, is the deadlock a surprise? Perhaps not but then again, with an election to come next year in the United States one fears that more political tomfoolery may continue to block progress from being made here.

The problem here is the uncertainty over what the deadlock could mean for a renewal of unemployment benefits and the payroll tax cut in the US. Perhaps tomorrow’s US GDP figure could serve US politicians a timely reminder as to why it’s so crucial they find common ground on debt talks.

A statement from Moody’s warning today that France’s Triple AAA credit rating remains at risk of downgrade given the moves in the country’s bond yields and weakening growth prospects hardly helped today either. Another stark rise in Spanish borrowing costs, where Spanish 10-year bond yields is fast approaching similar levels to that of Italian 10-year bonds, also troubled investors today.

It’s been a day with zero positive news out there and with debt problems becoming cemented even more, stocks have been broadly sold off strongly by investors.

The banks and miners were the two sectors worst hit, as one might expected given the strong correlations these two sectors have to investor risk appetite and exposures to the sovereign debt crisis. The FTSE 350 mining sector lost 5% on the day whilst the banking sector lost near 3%, with Lloyds Banking Group amongst the heaviest fallers.

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