Britain's top shares surrendered almost all of last week's gains on Monday, led lower by commodity stocks and banks, as political uncertainty and disappointing economic data revived investor concerns over the euro zone debt situation. The mood was darkened by data showing the euro zone's business slump deepened at a far faster pace than expected in April, suggesting the economy will stay in recession at least until the second half of the year.
The euro zone's commitment to reform may also be in doubt after Dutch Prime Minister Mark Rutte's government collapsed in a crisis over budget cuts, while Socialist leader Francois Hollande, who has vowed to seek changes to a new EU fiscal treaty, won the first round of France's presidential election. Some analysts said a defeat for incumbent Nicolas Sarkozy in the May 6 second round could weaken co-operation between France and Germany in dealing with the debt crisis.
"The prognosis for equity markets is they have to accept that under the current situation we're not going to be able to magic-wand this and see it finished in a few weeks," said Paul Kavanagh, a partner at Killik & Co. "My fear at the moment is that (investors) appear to be panicking because the outcomes are getting more uncertain as we get further into this crisis - not less uncertain."
The FTSE 100 index closed 106.58 points, or 1.9 percent, lower at 5,665.57, its lowest close since April 13, having ended up 0.5 percent on Friday to record a 2.1-percent advance on the week. "It looks like we're in a near-term corrective downtrend," Phil Roberts, chief European technical strategist at Barclays Capital, said, highlighting that the index failed last week to retrace more than 50 percent of the sell-off from its March high to this month's low.
He reckoned the 200-day moving average, at 5,568, could be revisited. Broadcaster BSkyB was one of only two gainers on Monday, ahead 0.7 percent, aided by its ongoing share buy-back programme, and ahead of third-quarter results due on May 2. Trading volume in BSkyB was robust, at one and a half times its 90-day daily average. Commodity stocks were the biggest drag on the UK blue chip index, as copper prices and crude dropped after mixed factory activity data from China alongside the concerns surrounding the euro zone.
China's factories posted their best performance this year as a measure of new business rose from multi-month lows in April, with the HSBC flash PMI at 49.1 vs final March reading of 48.3, but overall activity still contracted for a sixth successive month.
Banks also came under heavy pressure on worries about their exposure to the euro zone debt crisis ahead of the sector's first-quarter results season. Barclays, the first of the British banks to report, was the worst off, down 4.2 percent, ahead of its results on Thursday.
International Consolidated Airlines Group (IAG) shed 5.4 percent, the second-top FTSE 100 loser, as investors eyed integration issues after the owner of British Airways and Iberia completed its acquisition of Lufthansa's UK airline, bmi, on Friday. The initial 172.5 million pounds price of the deal was reduced after the German carrier failed to sell two of bmi's units - its low-cost operator, bmibaby and bmi regional - prior to completion, as had been hoped.
IAG's chief executive Willie Walsh said on Monday that the company was in talks with potential buyers for the two subsidiaries but that a sale was far from certain. Deutsche Bank said in a note: "We would have preferred if Lufthansa had been able to sell these businesses as their restructuring will take up BA management time. Nevertheless we believe that the deal price reduction will cover financial costs of (the) shutdown."
Technical factors also weighed on IAG shares, according to Silverwind Securities, which repeated its "sell" stance on the stock. Silverwind pointed out that IAG shares have fallen 2.75 percent over the last week and broken below both their 20-day exponential moving average (EMA) line, and their 50-day EMA line.
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