Financials and commodity stocks led a sharp fall on Britain's FTSE 100 on Tuesday as nervous investors extended a recent sell-off on heightened worries that Europe's debt problems would spread beyond Greece, Portugal and Ireland. Euro zone finance ministers on Monday promised cheaper loans, longer maturities and a more flexible rescue fund in an effort to prevent debt contagion in Italy and Spain.
But markets effectively told politicians that not enough was being done, with London's blue chip index closing down 60.20 points, or 1.0 percent to 5,868.96 as EU ministers set no deadline and a Dutch Finance Minister said a selective default for Greece was no longer being excluded. Worried investors drove the cost of insuring against a default by the eurozone's peripheral issuers to record highs, and Italian and Spanish bond yields spiked higher.
Mark Barnett, who manages the 167 million pounds Invesco Perpetual UK strategic Income Fund said, however, that markets tend to misprice assets in this environment and he would look to buy stocks not solely relying on a cyclical recovery, with BG Group, Centrica and AstraZeneca among his top five UK picks. Barnett though sees volatility for the foreseeable future as investors pressure EU ministers through their investment decisions for a resolution.
Financials were among the worst off as investors fretted over their potential exposure to the region's debts with Barclays down 2.7 percent and insurer Aviva off 1.5 percent. "We would suggest that the markets' focus on debt sustainability may highlight risks to current debt holding of European financials. We would expect continued underperformance of financials and Euro zone financials in particular," said Gerard Lane, equity strategist at Shore Capital.
Highlighting the worrying nature of the eurozone's plight, European Union leaders will hold an extra summit on July 15 to discuss the widening debt crisis. Miners and oil stocks tracked weaker commodity prices as worries over the eurozone debt crisis weighed on demand factors and sapped appetite for risk. Having rallied near 7 percent from June 23 to July 7 on hopes that Greece would avoid a debt default, the FTSE 100 has now lost over 3 percent in the past three trading days.
Bill McNamara, a technical analyst at Charles Stanley, said having completed a 61.8 percent retracement of the rally that began at the end of last month, if the 5,830-level failed to hold, the implication would be that the index is heading straight back down to test its recent lows, at around 5,645.
Travel-related stocks took a bashing after FTSE 250 travel firm Thomas Cook issued a profit warning that slashed its share price by 30 percent. Peer TUI Travel fell 7.5 percent, while blue chip airline International Consolidated Airlines shed 2.3 percent.
Thomas Cook, Europe's second-biggest travel company, said full-year profit would be 320 million pounds ($513 million), compared with a market consensus for around 380 million, reflecting tough conditions in Britain and unrest in the Middle East and North Africa (MENA) hit trading.
"It is not the downgrade but the scale of the miss that is the surprise," said KBC Peel Hunt analyst Nick Batram. Retail-related stocks led on the upside, with investors' favourite Burberry, sought for its high exposure to overseas markets, up 1.6 percent.
Marks & Spencer gained 1.2 percent ahead of a quarterly trading update due on Wednesday in which it is seen defying the broader economic gloom to report a seventh consecutive rise in underlying quarterly sales. On the macroeconomic front British inflation cooled unexpectedly in June and the trade gap widened, pointing to more weakness in the economy and providing support to those in the Bank of England who want to keep interest rates at a record low.