FTSE loses another 2 on Greek referendum surprise

The FTSE 100 lost over 2.5% in trading on Tuesday, with the UK Index weighed down by selling in heavyweight miners and banking stocks, marking a continuation from yesterday’s bearish theme after the Greek PM announced he would hold a referendum on the new EU bailout plans.

By 10.30am GMT the FTSE 100 had lost 2.5% whilst the DAX and CAC had both lost 4% respectively.

A de-facto referendum on Europe
The adrenaline from last week’s EU Summit deal has fully waned and investors are fast paying more attention to the fact that we are still none the wiser to understanding how the headline agreements will be achieved.

Moreover, the move by the Greek PM to hold a referendum on the EU bailout deal was a real surprise and given the public antipathy towards the austerity plans and the fact that the government has such a low approval rating, one questions where the public support for the package will come from and where that will leave Greece.

And what’s more, how can the Greek PM agree measures with the EU last week, and then in a matter of days turnaround and say the Greek people will in fact decide? Whilst the referendum is certainly incredibly democratic, the sceptics amongst us will read into it as the Greek PM trying to backtrack on his original agreements and this could bring Greece closer to an eventual default. It just smacks of yet more uncertainty and this puts the gains made in October, which was the best monthly performance on the FTSE since July 2009, under threat.

There is every chance the referendum is as much a vote about staying in Europe than the bailout deal itself.

At the heart of the issue here is the fact that just when investors had hoped that perhaps, Europe had aligned itself with solutions, the very people thought to have aligned remain some distance apart. Europe cannot contain the Greek crisis without adherence from Greece and the latest move to call a referendum takes the crucial decisions of the few and places them into the hands of the many, the same many that are already seething with discontent at the very people trying to resolve the problems.

As a result, we have seen investors move firmly back to ‘risk off’ mode, selling out of the heavyweight mining and banking equities, which are the key drag on the FTSE 100. The FTSE 100 has now lost 6% in the last three trading days, which has coincided with a more than 50% jump in the FTSE VIX, a market gauge of investor fear or pessimism, and so clearly last week’s delirium is already a long distant memory.

One of the only large cap stocks to gain on the day was G4S, the security firm, after it pulled its planned £5.2bn acquisition of Danish firm ISS. The firm failed to win enough shareholder support for the deal and its shares rallied 1% on the back of the news.

Leading the fallers were key UK banks Barclays, RBS and Lloyds, with shares losing 7%-8% in trading off the back of concerns over the sovereign debt situation in Europe whilst miners Xstrata, Antofagasta and Vedanta also weighed on the FTSE, losing 6%.

UK GDP grows 0.5% in Q3 but manufacturing contracts
Data from the Office of National Statistics (ONS) showed that the UK grew somewhat stronger than expected in the third quarter, by 0.5% from a previous quarter’s growth of 0.1%. Whilst the bounce in Q3 was better than expected, the expectations were already in place for a rebound in growth after the ONS had said that the second quarter was pressured by exceptional factors.

That said, data also out this morning showed that UK manufacturing contracted last month and fell at its sharpest rate since June 2009, with new orders at the lowest levels since March 2009. As such, the Q3 bounce in growth is being seen as merely just that, a bounce from a stagnate second quarter and in real terms this may mean that the UK is still in anaemic growth territory at the very best.”