Financials and commodities in retreat as investors extend sell-off

FTSE: 5,868.96 (–60.20) Mid-250: 11,786.045 (–94.01) Small Cap: 3,275.42 (–27.13):FINANCIALS AND commodity stocks led a sharp fall on Britain's FTSE 100 yesterday, 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 per cent 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 euro zone’s peripheral issuers to record highs, and Italian and Spanish bond yields spiked higher.

Mark Barnett, who manages the £167 million Invesco Perpetual UK strategic Income Fund, said 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, Centrica and AstraZeneca among his top five UK picks.

Financials were among the worst off as investors fretted over their potential exposure to the region’s debts with Barclays down 2.7 per cent and insurer Aviva off 1.5 per cent.

“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.

Travel-related stocks took a bashing after FTSE 250 travel firm Thomas Cook issued a profit warning that slashed its share price by 30 per cent.

TUI Travel fell 7.5 per cent, while blue chip airline International Consolidated Airlines shed 2.3 per cent.

Retail-related stocks led on the upside, with investors’ favourite Burberry, sought for its high exposure to overseas markets, up 1.6 per cent.

Marks Spencer gained 1.2 per cent ahead of a quarterly trading update due today in which it is seen defying the broader economic gloom to report a seventh consecutive rise in underlying quarterly sales. – (Reuters)