Debt crisis sparks fresh growth fears

LONDON: Britain's top share index was sharply lower at midday on Monday, as investors effectively told politicians around the world not enough was being done to stem the debt crisis threatening to derail the global economic recovery.

The European Central Bank on Monday bought Spanish and Italian bonds to halt contagion from the debt crisis in the peripheral euro zone nations, but that only briefly delayed a sell-off from a cut in the US credit rating by Standard & Poor's after the markets closed on Friday.

"Governments and central banks can do more. There's been a move away from G20 coordination to piecemeal self interest. (Global co-ordination) was helpful during the (credit) crisis, and that is something that has broken down," Philip Poole, global head of macro investment strategy at HSBC Global Asset.

"The principal concern is the growth outlook and the extent to which the growth outlook and the global recovery are being compromised ... It's all a hangover from the pre-crisis era, which was funded by leverage."

Finance chiefs from the G7 group of major industrial powers pledged to take whatever action was needed to stabilise markets that have lost faith in leaders' resolve to tackle the twin debt crises in Europe and the United States.

Miners, banks and integrated oil stocks led the FTSE 100 down 95.70 points, or 1.8 percent, to 5,151.29, adding to last week's fall of 9.7 percent.

The FTSE volatility index, a gauge of investor fear, shot up more than 28 percent on Monday, having risen all last week.

Miners again bore the brunt of the sell-off as worries grew over the outlook for demand, with concerns governments will be forced to adopt more austerity measures to keep a lid on the debt crisis, therefore stifling growth.

Global miner Rio Tinto fell 4.4 percent after Rio and Japan's Mitsubishi Corp proposed buying out Coal & Allied for A$1.49 billion ($1.56 billion).

But gold soared to all-time highs as investors fled to safety.

As an equity proxy for the precious metal, Randgold Resources added 2.5 percent, also supported by an upgrade in its investment rating by Deutsche Bank to "buy".

Mexican silver miner Fresnillo gained 0.6 percent, with Deutsche Bank raising its target price to 2,000 pence.

Elsewhere, Weir fell 7.6 percent, with traders citing a downgrade by Morgan Stanley hitting the engineer's shares as investors continue to shy away from equities in a flight from risk.

Analysts also said liquidity was playing a major role in the decline of Weir's shares, which have fallen more than 27 percent in the last 10 trading days.

"When funds find themselves forced to sell positions in panicked markets, the most liquid stocks bear the brunt of selling, simply because they can be sold," Singer Capital Markets said.

Citigroup said the market was pricing in a 27 percent earnings per share downgrade to its 2012 forecasts for the engineering sector.

On the upside, insurer Standard Life was up 2.3 percent ahead of first half results due on Wednesday.

US stock index futures pointed to sharp falls when Wall Street opens on Monday in reaction to the downgrade by Standard & Poors.

And investors will be looking to see if July's US employment index at 1400 GMT bears out Friday's above-forecast June jobs report.

Copyright Reuters, 2010