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FTSE hovers as banks and commodity stocks fall
by Rob Mackinlay on Jul 05, 2011 at 09:06
Banks and commodity stocks were suffering this morning but the FTSE 100 held onto its weekly gains and remained above the 6,000 mark, holding level at 6,016.
A potential stand-off between the European Central Bank and the credit ratings agencies over the definition of default for Greece was causing investor unease.
According to reports, a senior official said yesterday that the European Central Bank would use the best credit rating available for Greek debt from the three big ratings agencies, Standard & Poor’s, Moody’s and Fitch.
When the ECB lends money to Greece it does so using the Greek debt as collateral. But the bank is not allowed to use defaulted debt as collateral. So if the credit ratings say that rolling over debt is a default it could mean that a decision to lend more cash to Greece would be illegal. Fitch has said it may call a rollover a default but Moody’s has yet to make its stance clear.
Michael Hewson at CMC markets said: ‘Yesterday’s comments by an ECB official that the central bank would ignore a default rating recommendation unless there was a consensus across the board from all ratings agencies could be seen as trying to drive a wedge, or delay the inevitable with Moody’s declining to comment, while both S&P and Fitch have made their positions clear.
‘There is a concern that such an action by the ECB would stretch their credibility to breaking point. For now however that is a decision they won’t yet have to make.’
Other institutions will also have to decide on whether a rollover constitutes a default, such as the Credit Default Swap market (CDS) which is the equivalent of an insurance policy against bonds defaulting. Some investors may want CDSs to pay up if the rollover goes ahead.
The biggest faller on Britain's blue chip index was Associated British Foods (ABF.L) that dropped 1.3% or 14p to £10.72 but otherwise banks and miners were the key losers.
Commodity stocks were led down by Xstrata (XTA.L), down 1% or 14p at £13.79 as metals prices fell. Copper dropped 0.4% to $4.28 per lb while Brent Crude fell 0.75% to $110.5 per barrel and gold gained 0.8% to trade at $1,494.
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Aberdeen Live supplement: Fundamentals point to ongoing flows and solid returns from EMD
After a record year for inflows and market-leading performance in 2012, emerging market debt has taken a large step towards the mainstream. Our recent debate covers the outlook for the asset class this year and where opportunities can be found.