FTSE loses over 1 5 as euro debt cage is rattled again

The FTSE 100 lost over 80 points and more than 1.5% by afternoon trading as investors continued to flee risky asset classes such as stocks on fears of widening contagion of sovereign debt within Europe and the US.

A Spanish bond auction in the morning session was frankly dreadful and epitomises just how sensitive investors are right now. In an attempt to sell as much as 4 billion euros worth of 10-year bonds, Spain only managed to sell bonds worth 3.6 billion euros, paying an average yield of 6.975%, which teeters into unsustainable territory and was the highest cost of borrowing since 1997. Bid to cover ratio fell from 1.8 to 1.5, a marked decline in investor interest in picking up Spanish bonds and is testament to the fact that concerns have escalated significantly recently over the credibility of fiscal abilities in the region to meet creditors.

With an election looming, and the opposition People’s Party likely to win with a strong majority, it is hoped that a stronger political situation can help lead Spain out of its current fragile economic state. The problem was that the dreadful Spanish auction came at a time when the market was already on high alert with Fitch, the ratings agency, saying yesterday that it might reduce its ‘stable’ outlook for US banks due to exposure to the European sovereign debt crisis. The agency said that a lack of progress made in the eurozone debt crisis will likely darken the outlook for US banks and the risk of a negative shock is rising.

What we have essentially seen today with the Spanish bond auction is yet another escalation in the debt crisis and this is continuing to knock investor confidence. Whilst the ECB is trying its best to contain the crisis by buying up Italian and Spanish bonds, forcing yields lower, the market is fully aware of this and is merely plastering over a gaping debt wound that requires much stronger and longer term medication.

What we have seen on the back of today’s debt tremors is investors shying away from risky asset classes such as banking, insurance and mining stocks, favouring to put their money into safer haven asset classes. The FTSE 350 mining, insurance and banking sectors both lost 2% in trading whilst the heavyweight oil sector also lost 1.5%.

Lloyds Banking Group was the key drag on the FTSE, with shares losing 5.7%, whilst a number of heavyweight mining firms also added pressure on the UK Index.

UK retail sales rise unexpectedly
Interestingly enough the UK stock losses came on a day when there was some good news for the UK high street. UK retail sales unexpectedly rose last month by 0.6% when a fall of 0.2% had been expected. Whilst on the outset the sales growth is good news, one cannot help but digest these numbers with a pinch of salt, given the fact that this could have been influenced by shoppers taking advantage of early Christmas deals.