FTSE 100 drops on euro zone concerns, US stocks fall in early trade - UPDATE

UK stocks fell today as investors monitored the situation in Greece, where the government has yet to agree to a new round of budget cuts, which are necessary to receive more financial aid and avert a disastrous bankruptcy.

The FTSE 100 stood at 5,862 in early afternoon, down 30 points (0.5 percent) from Monday’s close.

The Greek government is under pressure to accept the terms of the next €130 billion bailout from the Troika of official lenders including the EU, the ECB and the IMF, which include another round of unpopular austerity measures.

Prime Minister Lucas Papademos faces opposition from other leaders of the ruling coalition, which warn of social unrest if more wage and pension cuts are imposed.

Media reports suggested that there is a tentative agreement and a deal could be struck before the end of the day, paving the way for the debt ridden nation to secure the next bailout package. However, a rebound in stock markets is seen as unlikely without a firm agreement in place.

In the meantime, European Commissioner Neelie Kroes told a Dutch newspaper that Greece’s exit would not lead to the breakup of the euro zone.

She added that the governments of Germany and the Netherlands would find it hard to convince their taxpayers that the bailouts are necessary if Greece fails to pass the necessary economic reforms to get its fiscal problems under control.

“The Greece situation continues to be watched carefully by investors, though the fact that we have not seen a large correction in stock prices thus far indicates that they remain confident that despite the wrangling and delays, an agreement will arise,” said chief market strategist at City Index Joshua Raymond.

Biopharmaceutical major Shire (LON:SHP, up 3.6pct at 2,206p) after Goldman Sachs raised its target price from 2,500 to 2,600 pence per share, while repeating its ‘buy’ recommendation.

Investors also bought financial stocks including financial services firm Hargreaves Lansdown (LON:HL., up 3.5pct at 456.4p) and interdealer brokder ICAP (LON:IAP, up 1.4pct at 388.5p).

Concerns over the euro zone debt crisis pushed base metal prices lower today, reducing demand for mining stocks.

Kazakh copper miner Kazakhmys (LON:KAZ, down 3.5pct at 1,148p) was the heaviest faller in the sector, followed by Xstrata (LON:XTA, down 3.4pct at 1,218p) and Eurasian Natural Resources (LON:ENRC, down 2.8pct at 701p).

Precious metals miners including Randgold Resources (LON:RRS, down 3.1pct at 7,330p) also were in decline as investors bought the US dollar, an alternative asset to gold, to protect wealth.

Other notable fallers included fashion house Burberry (LON:BRBY, down 3.4pct at 1,397p) and builders’ merchant Wolseley (LON:WOS, down 2.4pct at 2,234p).

US markets

US stocks dropped in morning trade, tracking losses in European and Asian markets.

The Dow Jones Industrial Average (DJIA) was down 25 points (0.2 percent) at 12,820 in morning trade and the broader S&P 500 index declined four points (0.3 percent) to 1,340.

Today’s macroeconomic calendar is very thin with no notable updates due to be released except for consumer credit data for December from the Federal Reserve. The key event of the day will be Fed chairman Ben Bernanke’s testimony to the Senate Budget Committee.

Speaking before the House Budget Committee last week, Bernanke said the economy had been on the mend, but said the pace of the recovery had been slow.

UK corporate news

Back in the UK, Xstrata and Glencore have agreed a merger deal, which will see the two FTSE 100 constituents create a US$90 billion resource group.

Under the terms of the merger agreement, Xstrata shareholders will receive 2.8 new shares in Glencore for every share they currently hold in the Anglo-Swiss mining group, providing them with a 45 percent stake in Glencore.

The deal values Xstrata at £39.1 billion, translating into 1,290.1 pence per share, which represents a premium of 15.2 percent to its closing price on February 1, the last day before the companies revealed they were in merger talks.

Other news in the FTSE 100 included an financial results report from BP (LON:BP., down 1.7pct at 481.1p), which raised its quarterly dividend by 14 percent to eight US cents per share, the first increase since the oil and gas supermajor resumed paying dividend a year ago.

The move came after BP saw an increase in its replacement cost profit from US$4.4 billion in the last quarter of 2010 to US$5 billion in the final three months of 2011.

In the FTSE 250, Bellway (LON:BWY, down 2pct at 764.5p) said the housing market remains resilient, however, it cautioned that it is unclear whether this strength is sustainable and could be better assessed at the end of March when it reports its interim results.

In addition, the house prices said growth in house prices will likely slow this year.

In the six months to end January, Bellway’s home sales rose five percent to 2,455 as private home sales surged 15 percent, resulting in an 8.7 percent increase in the average selling price to £183,000.

Fellow midcap tour group TUI travel (LON:TT., down 1.7pct at 203p) took advantage of the woes afflicting rival Thomas Cook to boost its share of the UK market.

The Thomson and First Choice owner said bookings for next summer were flat compared with a decline of 14% for the market overall.

The group added that UK Winter trading had improved with load factors and late sales margins ahead of the prior year, but the problems in North Africa hit demand and meant losses rose in the three months to December despite higher revenues.

TUI generated revenues of £2.85 billion, up from £2.72 billion, in the quarter but operating losses rose to £131 million from £117 million.