Market Report: Markets haunted by fears of debt contagion

The London market suffered another bruising session last night as traders sold out on worries that southern Europe's sovereign debt storm could worsen despite recent agreement on the Greek bailout.

The blue-chip index fell another 1.3 per cent, or 69.18 points to 5,341.93, taking its loss this week to nearly 4 per cent, against the backdrop of violent rallies in Athens, with protesters marching against austerity measures designed to shield Greece from bankruptcy. Worries about whether or not the Greek government would be able to cut spending and raise taxes by as much as planned were supplemented by fears for Portugal, with the cost of insuring the country's debt against default spiking after Moody's placed its credit ratings on review for a possible downgrade.

Analysts highlighted the possibility of the European Central Bank resorting to the so-called nuclear option of buying bonds issued by the most vulnerable countries. "No one thinks this is close to being considered, but plenty think we are heading in that direction," Greg Gibbs, a strategist at Royal Bank of Scotland, said in a note to clients. Credit Suisse said the ECB was likely to be forced into buying peripheral European debt and "if necessary, to ringfence Greece by announcing a huge support package for Spain", whose credit ratings were cut by Standard & Poor's last week.

the miners, a number of whom attempted a comeback in the early hours of trading, were broadly lower as sovereign debt fears weighed on the commodity markets. Kazakhmys, which was cut to "neutral" at UBS, was the hardest hit, shedding 61p to 1,239p, while the Eurasian Natural Resources Corporation, which was also downgraded to "neutral" by the broker, fell to 1,077p, down 10p, as copper prices touched their lowest level since February. UBS sounded a note of caution on commodity markets, which it said were set to suffer from a "restocking hangover" this summer as the demand for resources eases following the most aggressive rebuilding of inventories since 1984. Other factors, including further policy tightening in China and the planned Australian tax on miners' profits, also make for an uncertain road ahead, the broker added.

Banks were also under pressure, with Standard Chartered sliding 45.5p to 1,690.5p and HSBC losing 2.7p to 652.6p. The bears threatened to leave taxpayers with a loss on their investment in Royal Bank of Scotland, which fell by 0.35p to 50.4p, closing just above the Treasury's average buy-in price of 49.9p per share. The taxpayer is already sitting on a loss on its stake in Lloyds, which was 1.14p weaker at 60.1p as Credit Suisse strategists put figures on European banking sector's exposure to Greek, Portuguese and Spanish debt. "European banks hold, we believe, about $75bn of Greek, $46bn of Portuguese and $85bn of Spanish government debt (with around 80 per cent of total Greek government debt being held by foreigners)," they said.

The FTSE 100 leaderboard was sparsely populated, with only seven blue chips managing to close in the black. The precious metal producer Fresnillo, which specialises in silver, and the gold miner Randgold Resources rose by 43.5p to 807p and by 21p to 1,886p respectively as investors searched for a safe haven. BHP Billiton was also ahead, adding 21p to 1,886p as traders sought to capitalise on the weakness induced by news of the Australian mining tax, while BP gained 6.5p to 565p after saying that it had plugged one of the three leaks spilling oil into the Gulf of Mexico.

Home Retail Group was broadly unchanged, edging down by 0.1p to 268.8p as bid hopes came back to the fore. The catalyst was a new Morgan Stanley note, with the broker revising its view to "equal weight" owing to the prospect of deal activity. "We think the logic of integrating Argos with [Wal-Mart owned] Asda is strong," the broker said, adding: "We aren't so convinced as to encourage investors to buy Home Retail as it is unlikely [that] Wal-Mart would be prepared to invest several billion US dollars in a mature business, but believe that investors wishing to sell the UK retail sector should look elsewhere."

elsewhere, bid talk shielded Game, the mid-cap video games retailer, which rose 3p to 92.5p, against a 1.7 per cent or 169.3 point loss to 9,982.14 for the broader FTSE 250 index. The company has long been mooted as potential target for US peer Gamestop, a theory which gained traction last night after Investec said that the recent departure of its chief executive, Lisa Morgan, and the announcement that its UK chief operating officer, Terry Scicluna, intended to step down after a handover period "puts the company potentially in play".

The broker also highlighted the undemanding valuation, which it said reflected short-term trading risks while overlooking the potential for a recovery in the games industry. "The stock remains extremely cheap on all metrics," Investec argued, switching its recommendation to "buy" from "hold", with a revised 145p target price, compared with 109p previously.