Disappointing service sector surveys and signs of political instability in Germany lead London-listed equities to fall sharply today. With U.S. markets closed for Labour Day, EU investors focused on economic and political insecurities in Europe and Asia and favoured safe haves such as bonds, gold and Swiss francs over risky assets.
Tracing decline in the Asian markets, the FTSE 100 index slumped 3.6% or 189 points to 5,103. The FTSE 250 lost 2.9% or 297 points to 10,084.
The August Purchasing Managers’ Indices for the services sector in China, the eurozone and U.K. was released on Monday and data for the U.K. and China disappointed.
A slowdown in new business inflows drove the HSBC China Services PMI to its lowest ever recorded reading, sparking concerns of a slowdown in the world’s fastest growing economy “This reflects the effect of property and credit tightening measures,” commented Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC.
Closer to home, the Markit/CIPS U.K. Services PMI plummeted to 51.1, from 55.4 in July. This is the second steepest decline in the history of the survey, surpassed only by the foot-and-mouth related fall in 2001. Sluggish economic growth in the UK and the August riots took a toll on the service sector activity, resulting in the index’s slowest growth since December 2010. Moreover, the survey showed that purchasing managers’ confidence has reached its lowest point so far in 2011.
“Allied with soft manufacturing data and a slowdown in construction growth, the overall picture provided by the latest PMI surveys is one of a stuttering UK private sector”, pointed out Paul Smith, Markit’s Senior Economist.
Further afield, German Chancellor Angela Merkel’s Christian Democrat Party suffered another loss on local elections in the state of Mecklenburg-Vorpommern on Sunday, igniting fears that lack of domestic support can decrease the Chancellor’s resolve to support peripheral Europe in its debt struggles. Germany is also facing allegations that its contribution to the bailouts of Greece, Ireland and Portugal could be in violation of German and European law. The German constitutional court will rule on this case on Wednesday.
On the London Stock Exchange, gold miner Randgold Resources (RRS) was once again the only mining stock in favour. On Monday, it was also the only equity that managed to stay above water, adding 1.0% by market’s close.
On the flipside, resource stocks and major banks tanked. Barclays (BARC) Lloyds Banking Group (LLOY) and Royal Bank of Scotland (RBS) lost 6.0%, 6.7% and 12.0% after rating agency Moody’s reiterated its stance that it might downgrade a number of key U.K. financial institutions and further deteriorated the sector’s outlook.