Cost of Spanish borrowing soars above 7pc as markets fall
BRITAIN’S top shares saw an opening leap swiftly reversed in early trade on Monday as relief at Sunday's Greek election result was countered by a fresh spike in bond yields for Spain and Italy, showing the euro zone debt crisis was far from over.
A narrow victory by pro-bailout parties in Greece over radical leftists eased concerns the debt-laden country could leave the euro zone, which would have dealt a savage blow to the region, but with major problems in Spain, and concerns over Italy, severe uncertainties remain.
Spanish 10-year government bond yields rose to 7.14pc, their highest during the euro's lifetime.
Greece, Ireland and Portugal were forced to seek international bailouts soon after their 10-year bond yields surpassed 7pc. Italian 10-year bond yields rose to 6.08pct.
"A new Greek coalition government is unlikely to be able to restore economic growth or deliver effective reform without substantial financial help from the rest of the euro area. Meanwhile, the market focus will shift back to the larger economies of Spain the Italy which are also struggling against a weakening global growth backdrop," said Trevor Greetham, Director of Asset Allocation at Fidelity Worldwide Investment in a note.
"It will take substantial action from the world's largest central banks to turn the global growth cycle back up again. In the meantime, we remain cautious on stocks and commodities, preferring gilts, global property and cash in our multi asset funds," Greetham added.
Heavyweight banks, energy stocks and miners which had led the opening blue chip rally, swiftly fell back as investors' appetite for risk evaporated.
Leaders of the Group of 20 major economies met for a summit in Mexico today and tomorrow, and they are expected to confirm they will make new crisis-fighting loans to the International Monetary Fund as Europe's debt crisis threatens to stretch Europe's own rescue funds.
The main focus, however, will be on a two-day Federal Reserve Open Market Committee meeting later this week. A decision on US monetary policy is due after the London market close on Wednesday, with investors looking for further liquidity injection moves by the Fed to boost a flagging economy.
"I don't think we are going to get anything sensible out of the G20, because we never have, so the most important thing for the market now is what the Fed is going to do on Wednesday," said David Morrison, market strategist at GFT Global.
"The question is whether the situation is bad enough for the Fed to take action at this stage ... and then if they don't take action at this meeting will their hands then be tied as we get in to campaigning for the U.S. Presidential Election in November," Morrison added.
At 0847 GMT, the FTSE 100 index was down 5.15 points, or 0.1pc at 5,473.66, falling back sharply from an opening peak of 5,555.32.
Part-state-owned lender Lloyds Banking Group was the biggest blue-chip faller, down 3.2pc. The bank is leaning increasingly towards a flotation of the 632-branch business known as Verde, as hopes fade that its preferred option of a sale will go ahead, The Times said on Monday.
Among individual blue chip fallers, Babcock International shed 1.7 percent, as the defence stock took its place in the FTSE 100 index following promotion from the mid caps.
Hedge fund Man Group, which moved the other way, down to the FTSE 250 index, gained 0.6pc.
In an unexpected move, Man Group has named Jonathan Sorrell, currently its Head of Strategy and Corporate Finance, as its finance director, replacing Kevin Hayes, who is leaving the company with immediate.