London's blue chips were mired in a sea of red last night as the European debt crisis sapped sentiment across the stock market. The FTSE 100 index endured a bruising decline to 5,460.38, down nearly 2 per cent or 106.96 points, as Italy's borrowing costs went through the roof.
Hopes that shares would bounce after the Italian Prime Minister, Silvio Berlusconi, signalled his intention to resign overnight were dashed as traders considered the still uncertain road ahead as Europe attempts to quell the debt storm.
The possibility of elections in Italy, and the continued uncertainty surrounding Greece, kept buyers at bay, with the bears reigning supreme on both the benchmark and the mid-cap FTSE 250 index, which was 1.4 per cent or 150.47 points lower at 10,268.87 last night.
Adding to the alarm across the City was the news that the clearing house LCH.Clearnet had increased the margin it demands on Italian debt. The move, which in effect raises the cost of holding Italian sovereign bonds, was "clearly unsettling as it represents a milestone on the road trodden previously by eurozone bailout candidates", Stephen Lewis, chief economist at Monument Securities, said.
Angus Campbell, the head of sales at the spread betting firm Capital Spreads, said the session showed that "there is still huge nervousness over the European sovereign debt crisis, which is simply intensifying day by day". He added: "Italy is the big worry for the eurozone at the moment and if there is no quick resolution to their political vacuum as well as further proper reforms to sort out their fiscal position, the markets will continue to punish them."
The vast majority of the FTSE 100 was in negative territory – but, even then, Admiral stood out, with the car insurer's stock sliding by an eye-watering 26 per cent. The driver was a warning that pre-tax profits were likely to be at the lower end of analyst hopes as the business counts the cost of higher claims. Responding to the announcement and the market reaction, Jefferies analysts said sharp share price fall "looks justified". They warned: "There is now significant uncertainty on earnings and growth is slowing sharply."
Although the weakest, Admiral, down 305.5p at 887.5p at the close, was by no means the only financial stock at the lower end of the index.
From the broader insurance sector, Aviva was 16.4p down at 307.8p, while Prudential lost 25.5p to 611p. Banks, too, were under pressure as investors lost their appetite for risk. HSBC was the hardest hit, sliding 31.2p to 506.3p after highlighting the challenges faced by the global conomy as the European crisis rages on. The bank also reported a drop in third-quarter profits.
Of the more the UK-focused lenders, Royal Bank of Scotland was the worst off, sliding by 1.24p to 21.09p. Part-nationalised peer Lloyds was 1.37p lower at 27.53p as Moody's warned that it may cut the group's ratings. The agency said its review was "prompted by the significant upheaval within Lloyds' senior management following the announcement that the current CEO, Antonio Horta-Osorio, has had to take a temporary leave of absence".
Beyond the financials, Tullow Oil fell 76p to 1,360p after revealing a closely followed exploration well off Liberia's coast had failed to find oil in commercial quantities. The oil prospector also downgraded production guidance for the year, as it dealt with mechanical issues in Ghana.
The news led the RBS analyst Phil Corbett to lower his target for Tullow to 1,465p from 1,505p, though he stuck with his "buy" view. "We still believe the shares warrant a significant valuation premium to reflect the depth and potential of the exploration portfolio," he said.
On the upside, investors made a beeline for stocks with defensive qualities or where earnings are relatively less prone to the economic cycle. This was good news for utilities and power companies such as International Power, which edged up by 3p to 336.7p. Aggreko, the temporary power provider, was also in favour and while it did not make it into the black, it managed to outperform and was broadly unchanged at 1,771p, down just 7p.
Further afield, Premier Foods continued to gain ground despite the weakness in the wider stock market, adding another 0.205p to close at 40.17p. The food producer has drawn much interest in recent days after announcing that its lenders had agreed to defer an upcoming covenant test, giving it breathing space as it continues refinancing talks.
Last night, the company was also aided by Investec, whose analysts decided to move their recommendation on Premier's stock to "buy" from "hold". Despite the strong gains seen in recent days, Investec said the market appeared to be under-appreciating the significance of the covenant deferral announcement.