The FTSE 100 wiped out the gains it made in the previous week during the past five trading days, shedding 200 points, or 3.8% amid a selloff propelled by worries over the European debt crisis and new financial regulations recently passed by the United States along with a naked short selling ban introduced by Germany.
Jitters over Europe’s debt situation have not calmed despite a €750 billion rescue fund that has recently been agreed on by the EU to prevent the fiscal crisis that has put Greece on the brink of bankruptcy and required a multi-billion aid package from the EU and the International Monetary Fund (IMF) to keep the country solvent from spreading into other euro zone states. The austerity measures introduced by Greece in order to secure €110 billion in loans have led to public unrest, while public opinion polls and recent elections in Germany, which has contributed most of the Greek bailout package and will be one of the leading donors to the rescue fund, have shown staunch opposition to participation in any such bailouts and strong disapproval of the government’s actions.
The approval of Germany’s participation in the bailout fund by the parliament failed to calm investor worries and had little impact on stock markets. However, Germany’s decision to ban naked short selling, which means short selling financial instruments without owning or borrowing them in advance, raised concerns about the possible impact on the liquidity in bond markets and the possible introduction of such a ban in other European countries. Following the announcement, markets in Europe and the US plunged by more than 2%. Losses were extended on Friday when the FTSE 100 and the Dow Jones Industrial Average slipped below 5,000 and 10,000 respectively.
Base metal miners were the biggest fallers among the blue chips this week. Copper and nickel continued falling on Chinese demand concerns after the country introduced more measures to tighten its monetary policy and keep the rising inflation under control, raising reserve requirements for banks by 50 basis points. This week, Bank of America Merrill Lynch downgraded mining giants Rio Tinto (LSE: RIO) and Xstrata (LSE: XTA) to “neutral,” also cutting peers Kazakhmys (LSE: KAZ) and Vedanta Resources (LSE: VED) to “underperform.”
Banks were hit on Friday after new financial regulations were passed by the US Senate, placing restraints on large banks, curbing derivatives trading and setting up a new consumer protection agency.
The FTSE 100 trimmed losses to just 0.2% on Friday. Oil and gas supermajor BP (LSE: BP) emerged as the biggest faller with a loss of 4.2%. Medical devices manufacturer Smith & Nephew (LSE: SN), pharmaceutical company Shire (LSE: SHP) and beverage group SABMiller (LSE: SAB) followed declining 3.7%, 3% and 2.6% respectively. Another pharmaceutical stock GlaxoSmithKline (LSE: GSK) and National Grid (LSE: NG) both dropped 2.3%. Commercial property company British Land (LSE: BLND) and packaging group Rexam (LSE: REX) lost 1.6%.
Miners were the top performing stocks in the FTSE 100. Xstrata (LSE: XTA) was in the lead with a 6.4% climb. Fresnillo (LSE: FRES) and Eurasian Natural Resources (LSE: ENRC) advanced 4.3% and 4% respectively. Peers Antofagasta (LSE: ANTO) and Vedanta Resources (LSE: VED) added more than 3.5%, as did banking group Barclays (LSE: BARC).
US stocks rallied late on Friday after declining sharply in early trade. The Dow Jones Industrial Average advanced 1.25%, the broader S&P 500 index rallied 1.5% and the technology heavy NASDAQ composite surged 1.15%.
The Dow Jones index is currently projected to shed 0.1% on Monday, while the FTSE 100 is seen 0.2% higher.