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FTSE see s small gains as RBS and Lloyds attracts muted bargain hunting despite Italian bond auction

Article By: ,  Financial Analyst
November 25, 2011 3:37 PM

A strong afternoon rally was enough to lift the FTSE 100 for the first trading session in ten on Friday, as RBS and Lloyds both attracted muted bargain hunting after suffering heavy falls recently. However, a poor short term Italian bond auction kept investor tensions high going into the weekend.

At 3pm, the FTSE 100 had rallied 1% or 50 points to trade at 5177.

Shares in Royal Bank of Scotland and Lloyds Banking Group led UK stocks higher in trading, with both bank share prices rallying between 2% and 4% on the day. Both stocks have lost around 40% in value over the last four weeks alone and so naturally the sharp falls has attracted bargain hunters hoping to benefit from any short term rally that may come. This was enough to lift both banks share prices today.

Speculation that members from eurozone states were discussing dropping Private Sector Involvement clauses from the European Stability Mechanism (ESM), the bailout fund, also helped to push banks and insurance firms higher in trading. Early indications are that whilst Germany maintains opposition to such a change, France, Italy and Spain are all lobbying for such a move and this could help reduce fiscal burdens on banks and insurers.

However, investors in Europe witnessed yet another dreadful bond auction on Friday morning, after Germany’s debt auction earlier in the week, with Italy seeing 6 month short term bill selling at a gross yield of 6.5%, a huge jump on a similar term auction a month ago of 3.5%. A 2yr bond sale also saw a significant yield escalation, rising from 4.6% to 7.8%, far past the 7% level seen by most traders as unsustainable. The fact that investors are demanding a yield of 6.5% for a six month bill and near 8% for a 2yr bond suggests that confidence in Italy’s ability to repay its lenders is incredibly weak.

Today’s Italian bond auction and Germany’s auction earlier in the week sends a stark warning to the markets as to how much confidence there is to lend at the moment and whilst this certainly shows weak appetite to lend to indebted nations, one questions how much this weakness of confidence has infiltrated interbank lending too.

A rally of 0.5% in the price of Nymex Crude Oil helped to increase near term demand for oil and energy stocks, which also provided a heavyweight fillip for the FTSE 100 to push higher.

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