FTSE 100 falls 44pts as Spanish bailout remains in focus

The FTSE 100 fell 44points or 0.74% by noon in trading on Tuesday as traders continued to lock in their gains after last week’s surge which helped to rally European stock indices such as the German DAX to its highest levels since July last year.

Investors convinced Spain will require a full bailout
Most investors remain convinced that Spain will ultimately require a bailout via the newly created ECB’s ‘Outright Monetary Transactions’ programme but a sticking point remains the conditions to which a bailout request would come with. Part of Mario Draghi’s emphasis when announcing the new bond buying measures was the fact that they need to be formally requested by member states first and that they will not come in the form of a free lunch.

Despite Prime Minister Mariano Rajoy’s determination that the country is implementing the right fiscal steps to steer the country through its drastically fragile economy, the conditions of a bailout remains a sensitive issue. Confirmation in a television interview this morning with the Spanish Deputy Prime Minister Soraya Saenz de Santamaria that the country was evaluating the conditions of a bailout reminded the market that this remains a very real possibility in the near term.

Spain successfully sold slightly more than the €4.5bn they were hoping for in short dated bonds in an auction today though there is very little investors can take away from the sale of short dated bonds in a market awash with central bank stimulus liquidity.

Traders diversifying
From a sector perspective we have seen profit taking in the three heavyweight sectors; miners, oil and banks. All three FTSE 350 sectors are lower by over 1% in trading, which is to be expected as these are the main sectors which have benefitted from the recent bullish moves in European and US equity markets. It is natural that these three sectors therefore are forced lower when traders decide to lock in their profits.

Interestingly we have seen a diversification of funds into defensive stocks today such as tobacco firms and Vodafone, which lists amongst the top risers on an otherwise bearish day for the FTSE 100. This is an indication that investors could be diversifying their risk after a strong run to protect themselves if we see a stock market correction. Tobacco stocks saw additional support thanks in part to a bullish note on the sector from broker Nomura, who upgraded their EPS targets for British American Tobacco whilst Morgan Stanley said that Imperial Tobacco offers an attractive entry point.

Aviva shares fell 4.5% to slump to the bottom of the FTSE 100 performers list after Deutsche Bank and Bank of America/Merrill Lynch cut their guidance on the stock on valuation grounds.