Amid excessive volatility and palpable market uncertainty, LSE-listed shares returned to negative territory on Wednesday. Commitment by the U.S. Federal Reserve to freeze interest rates at their current lows until 2013 lifted market spirits in early trade but worries over EU sovereign debt and sluggish economic growth prevailed. In London, the Bank of England cut its forecast for annual GDP growth.
Ultimately, the FTSE 100 index closed 3.1% or 158 points lower at 5,008. The index saw a 5.1% spread between its highest and lowest point today. The FTSE 250 index moved further below the 10,000 mark, dropping 200 points or 2.0% to 9,891.
Late yesterday, the U.S. Federal Open Money Committee announced that it “currently anticipates” keeping rates low until mid-2013 in its commitment to boosting economic growth, which the FOMC dubbed as being “considerably slower” than expected. The decision restored market optimism in New York on Tuesday, but its positive impact across the Atlantic was short-lived.
This policy shift “should weaken the dollar against all currencies and keep Treasury yields low,” commented Trevor Greetham, portfolio manager of Fidelity's Multi Asset funds. “Risky assets ought to rally for a while given the deeply oversold sentiment backdrop but the longer term outlook will depend on the economy and lead indicators are weak,” he added.
Along with the certainty of fixing interest rates comes a sacrifice of monetary policy flexibility, pointed out Keith Wade, Schroders’ chief economist and strategist. “Either the Fed is right and the economy struggles for the next two years with adverse pressure on earnings and the budget deficit, or it is wrong and we see activity pick up with the risk of inflation as policy is kept too loose,” he said.
On EU markets, sovereign debt woes returned to the front of investors’ minds and summoned the market bears. The leading equity indices in Madrid and Milan fell 5.5% and 6.6%, respectively. Stemming from debt concerns, sentiment surrounding EU banks remained abysmal across European bourses. In London, Barclays (BARC), HSBC Holding (HSBA), Royal Bank of Scotland (RBS) and Standard Chartered (STAN) shed 5.3%-8.7%. Barclays and Standard Chartered were further hit by their shares trading ex-divided today.
Disturbingly, French sovereign debt found itself under pressure – a phenomenon observed in recent trading sessions that points to worries that Paris may not be able to handle the double pressure of soft economic growth and a potentially rising bailout bill from peripheral Europe. The CAC40 closed down 5.5% on Wednesday amid unfounded rumours of a potential credit downgrade. Credit-default swaps for Société Générale (GLE) rose to record levels and the bank’s shares slumped 23% at one point, to settle 14.7% weaker at close of business.
In London, Mervyn King, Governor of the Bank of England, acknowledged “the public and private debt overhang” as one of the key headwinds slowing down economic growth and one that is “becoming stronger by the day." The Bank cut its growth forecast for 2011 to 1.5% from a previous forecast of about 1.8%, and cut its 2012 forecast to around 2% from 2.5%. It did not rule out the possibility of a second round of quantitative easing.
On the London Stock Exchange, mining stocks joined banks on the casualty list. Essar Energy (ESSR) collapsed 12.6% as downbeat analysis from Goldman Sachs exacerbated the effect of broader risk aversion. Peers Antofagasta (ANTO), Eurasian Natural Resources Corporation (ENRC) and Kazakhmys (KAZ) lost 4.5%-7.7%.
RSA Insurance Group (RSA) and Schroders (SDR), down 4.5% and 5.2% respectively, joined the group of equities falling after trading ex-dividend.
On the flipside, Standard Life (SL.) and Man Group (EMG) bucked the trend in financials. The insurer gained 5.7% on the back of its better-than-expected first-half profit while the hedge fund manager added 3.2% after announcing a 3.2% increase in the net asset value at its flagship AHL fund.
Meanwhile, an upbeat note from Goldman Sachs lifted Weir Group (WEIR) 1.9%.
