Markets dip - but stay calm over hung parliament
Updated on 11 May 2010
The continued political uncertainty at Westminster fails to produce major panic on the markets, but shares sink after yesterday's big gains.
London's shares finished one per cent tonight as relief over efforts to prop up the euro faded and the UK's political leadership remained mired in uncertainty.
The FTSE 100 Index, which had soared more than five per cent yesterday in its best day since December 2009, slipped today by almost two per cent as investors took their money off the table.
Markets sagged around the globe despite the weekend agreement of a 750 billion euro (£650bn) bail-out deal for struggling nations.
The pound was steady at 1.48 against the dollar for most of the day but rose above 1.49 later in the session as the prospects of a Tory-Lib Dem pact hardened.
"It will come as a relief to many investors once this particular unknown gets taken out of the equation," said Tim Hughes, head of sales trading at IG Index.
There was also better news for the UK after manufacturing grew at the fastest pace for eight years in March, along with signs that international investors are not yet ready to desert UK gilts.
The first auction of £2.25bn of government debts since the General election was two-and-a-half times oversubscribed, according to the UK's Debt Management Office.
In London most stocks were in the red as banking and commodities firms - many of which posted double-digit gains yesterday - retreated. Part-nationalised Royal Bank of Scotland slumped five per cent while Barclays and Lloyds Banking Group fell 4 per cent.
"The banks are under pressure as no major headway has been made into establishing a government at Westminster," ETX Capital's Manoj Ladwa said.
Elsewhere, tour operator TUI Travel - which owns Thomson Holidays - and budget airline easyJet both posted losses after revealing a combined blow to profits from April's volcanic ash cloud of up to £160m.
Faisal Islam analysed the political impact on the markets
There's no objective evidence so far that the hung parliament hiatus is causing market panic.
The single best indicator: demand to buy UK government debt, was tested in what could have been an unfortunately-timed debt auction at 1030 this morning.
The result was even more bidders to lend Britain money than is normal. The Debt Management Office got £5.6bn offers for its £2.25bn worth of bonds, a 'cover ratio' of 2.47 times, much higher than normal. Stock markets were down a bit, but less than they were in Europe.
So far, this is more of a general sell-off after yesterday's eye-watering market surges. The pound is down against the dollar, but broadly unchanged versus the euro.
Basically, markets are still very much focussed on the much bigger story around yesterday's euro bailout.
I have no doubt that an event such as the collapse of Lib Dem-Conservative talks, would see a notable market reaction. And there is a susceptibility to some sort of speculative attack.
But suggestions that markets are "quaking" are, so far, well off the mark.
Although London's leading share index fell back amid the continued confusion, this was not the case for the other financial capitals, with traders more reassured by Europe's action to stop the Greek debt crisis spreading further.
Shares had soared more than five per cent yesterday on news of the EU and IMF package, worth some £650bn, to shore up the Greek economy and that has eased the pressure on Britain while more talks to form a new government take place.
The markets have shown that they are not entirely happy at the suggestion of a Lib-Lab coalition - and that has undermined investor confidence.
The price of government bonds has dropped, pushing up the cost of public borrowing. This morning the government's gilt auction went perhaps more smoothly than expected - indicating, according to the Guardian's analyst "healthy demand from investors" - with the gilt issue 2.5 times oversubscribed.
One London based gilt trader said the markets wanted a conclusion: "whilst we are without a conclusion, the market will remain nervous", he said.
And the head of the financial watchdog in France - former cabinet minister Jean-Pierre Joyet, said the UK was "likely to be targeted, given the financial difficulties they have. Help yourself", he told Europe1 radio, "and heaven will help you."
The markets had set themselves against a Lib-Lab coalition, especially one which relies on a host of smaller, nationalist parties, to stay in power.
That could mean expensive concessions to keep them on side - and the ever-present risk that it could all fall apart.
