The FTSE 100 fell for the seventh consecutive trading day on Monday, with investors continuing to drop stocks in favour of safer assets, unconvinced that governments and central banks have a grip on the global debt crisis. Miners, banks and integrated oil stocks led London's blue chip index down 178.04 points, or 3.4 percent, to 5,068.95, its lowest closing level since July 7, 2010.
The FTSE volatility index, a gauge of investor fear, shot up more than 28 percent on Monday, having risen all last week. The sell-off since July 29 wiped $3.4 trillion off the value of world stocks, a sum equivalent to Germany's GDP. But the retreat on equity markets is still some way less pronounced than the crashes 2008 or 1987. The European Central Bank on Monday bought Spanish and Italian bonds to halt contagion from the debt crisis in the peripheral eurozone 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.
"Markets do not generally move in one direction; in a bear market, there are normally short squeezes - times when the market goes up, albeit temporarily. Where are the bargain hunters?" said Louise Cooper, markets analyst at BGC Partners. "To me, these failed rallies are not a good sign and indicate the depth of investor concern." There was further concern over the health of the world's biggest economy after a gauge of the US job market declined in August.
"The principal concern is the growth outlook and the extent to which the growth outlook and the global recovery is being compromised ... It's all a hangover from the pre-crisis era, which was funded by leverage," said Philip Poole, global head of macro investment strategy at HSBC Global Asset. Weir fell 8.7 percent, with traders citing a downgrade by Morgan Stanley hitting the engineer's shares. 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. Gold soared to all-time highs as investors fled to safety.
As an equity proxy for the precious metal, Randgold Resources , the only blue chip riser, added 7.4 percent, also supported by an upgrade in its investment rating by Deutsche Bank to "buy". Ted Scott, director of global strategy at F&C, which has around 108 billion pounds worth of assets under management, said equity markets offer investors valuation opportunities rarely seen over the previous 10 years.
He said the UK market is on an earnings yield of over 11 percent compared with a 10-year gilt yield of about 2.75 percent and a negative equivalent real gilt yield, but appetite for risk just isn't there. "For a sustainable rally, the markets need to see a credible solution to the euro debt crisis, and until that happens, markets could fall further," he said, adding unlike 2008 "the valuation floor is not far below current levels because so much bad news is already discounted".