EU shares rise but FTSE underperforms on mining weakness

European markets gained in choppy trading on Monday, with investors encouraged enough by the much leaked elements of a potential new rescue plan to stop debt contagion within the eurozone to buy into shares from last week’s lows, helping the DAX and CAC to rally 2% and 1.4% respectively.

The FTSE 100 however underperformed broader European stock indices, with the UK Index weighed down by more weakness in heavyweight mining companies and metal prices continuing to lose ground today. The FTSE 100 swung between losses of 1% and gains of 1% to close higher by just 22 points.

A very strong day for UK listed insurers such as Aviva helped to keep the FTSE 100 from slipping into negative territory. The FTSE 350 insurance sector rallied 3.8%, with investors enticed into buying into the sector on the much speculated new rescue plans being muted by multiple government officials within the EU. Aviva and Legal & General shares saw some of the biggest gains on the day in London trade, rallying 6%, whilst similar gains were also seen for Barclays and RBS.

The fine print on the likely rescue plan is far from transparent 
Much has been speculated about what the final rescue plan could look like but in truth with a threefold plan of increasing the EFSF’s power to €2trillion, bank recapitalisation and a 50% haircut on Greek debt, there remain more questions than answers. Certainly the conviction and urgency of the governmental bodies to enforce new actions to support the eurozone is clear for all to see and this is welcoming.

Though the processes involved, which would be hugely difficult to say in the least, to ratify a leveraged top up of the EFSF along with the consequences and likely contingencies that would sanction a 50% haircut on Greek debt remains far from transparent. Investors will learn more about these issues before a widespread vote of confidence on these speculated actions can be achieved.

Nonetheless, investors have been given a bit of a confidence boost that the financial powers are now acting more and talking less to combat contagion and a lack of liquidity within the eurozone. It is this confidence boost that was enough to support equity markets and trigger some bargain hunting today.

The miners were however the main drag on the FTSE, with the sector losing another 1% on the day to add to last week’s heavy losses of 14%. The sector is closely tracking the sharp drop in metal prices which have fallen in the last few weeks as metal speculators liquidate their holdings in order to answer margin calls on equity positions, whilst the strong US dollar has also pressurised dollar denominated metals. Fresnillo and ENRC saw losses of 7% and 3% respectively as a result.