Bundesbank: euro crisis 'not over'; pound slumps on triple dip fears

(Update) The FTSE 100 held on to an afternoon rally after other markets fell in response to a warning from Germany's central bank that the eurozone crisis was not over.

Jens Weidmann, head of German's Bundesbank and a member of the European Central Bank's governing council, said the eurozone's 'crisis is not over despite the recent calm on financial markets'. He emphasised the shaky ground on which the region's economic stability was based.

US investors took the comments as a cue to take profits after seven days of rising markets. The Dow Jones industrial average dipped 9 points or 0.1% to 14,427 while the S&P 500 shed four points or 0.3% to 1,551.

Gold gained 0.7% to $1,592 an ounce as bargain hunters moved in to buy the precious metal which has been sold off during this year's stock market rally.

Markets in Europe were becalmed as investors wondered what to do next. The Euronext 100 index edged up less than a point to 723.9 points while the euro slipped 0.1% to $1.3030 against the dollar.

Dividend boost from Antofagasta

The UK's FTSE 100 did better closing 11 points or 0.2% up at 6,513, helped by copper miner Antofagasta (ANTO.L) which rose over 3% to £11.37 after delighting investors with a bigger-than-expected dividend. Kazakhmys (KAZ.L) shot up 6% to 552p in response. But Fresnillo (FRES.L) fell 20p or 1.3% to £14.70 after the silver miner showed the cost and pricing pressures on the sector with a 19% drop in 2012 profits.

Lloyds Banking Group (LLOY.L) gained 0.7p or 1.5% to 50.8p after it sold a 20% stake in St James's Place (SJP.L), the upmarket financial salesforce, for £520 million. St James's fell 18.5p or 3.4% to 518p.   

British Land (BLND.L), down 4.4% to 560.4p, was the biggest faller on the FTSE 100 after the property developer raised £493 million from investors in a placing of new shares at 550p each.

Triple dip 'almost certain'

The pound slid 0.25% to $1.4875 after a dire set of industrial production figures raised the prospect of the UK falling into a 'triple dip' recession requiring further Bank of England stimulus to lift the flat-lining economy. 

UK industrial production plunged 1.2% month-on-month in January, contrary to expectations of a small rise, adding to the pressure on chancellor George Osborne before next week’s Budget.

The National Institute of Economic and Social Research, a leading think tank, added to Osborne's woes by cutting its estimate for output in the three months to January to -0.1%.

‘It is almost certain that we are in a triple dip,’ said Scotiabank economist Alan Clarke after the publication of manufacturing figures. The economy contracted by 0.3% in the last quarter of 2012 having only briefly crawled out of recession.

Concerns are growing however about the diminishing impact of the Bank of England's 'quantitative easing' programme which has seen it create £375 billion with which to buy government bonds in order to depress long-term borrowing rates. Last week the bank's monetary policy committee resisted an extension to the scheme, but it is expected that Mark Carney, who succeeds Sir Mervy King as governor in July, may well authorise more emergency-style stimulation. 

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The decline in industrial production data came alongside figures showing the trade deficit narrowed for a third month running in January to £2.4 billion from £2.8 billion in December.

But even those figures will provide little succour for Osborne and prime minister David Cameron, who last week pledged to stick to the coalition’s deficit cut plan even after the UK had its AAA credit rating removed by Moody’s.

‘Admittedly the trade balance has improved, but this is more to do with weakness in imports than a pick-up in exports. As such it underlines the weak domestic demand story in the UK,’ said James Knightley of ING Bank.

Chris Williamson of data company Markit added that much would depend on the UK’s dominant services sector. ‘Whether another recession can be avoided is largely dependent on the far-larger service sector, which is seeing reasonable growth compared to late last year,’ said Chris Williamson of data company Markit.