London: Britain’s top share index was lower at midday Thursday as renewed doubts about the sustainability of a global recovery dented commodity stocks, and banks weakened as investor appetite for risk ebbed.
By 1100 GMT, the FTSE 100 was 38.73 points, or 0.8% lower at 5,139.79 after falling 1.3% on Wednesday to its lowest closing level in nearly two weeks.
In a statement on Wednesday at the end of a two-day meeting, the US Federal Reserve scaled back its assessment of the pace of recovery, taking note of pockets of weakness, and also issued a cautionary note about volatile financial markets in light of Europe’s debt woes.
The shaky demand outlook on this cautious statement offset any optimism for the mining sector from political developments in Australia which appointed a new prime minister, Julia Gillard, the first woman to hold the office.
She offered to end a dispute over a controversial “super profits” mining tax threatening $20 billion worth of investment in the country and which has unnerved voters.
Miners were the main drag on the index, with Rio Tinto and Xstrata among the heaviest fallers, down 2.4% and 1.7% respectively.
The downbeat US news reinforced a sense that a recovery in stocks, which saw seven days of consecutive gains earlier this month, was driven by technical factors rather than a conviction the global economic situation was improving.
“People are arguing the recent rally was just a short squeeze (where investors liquidate short positions) and funds having to invest,” said Jack Sheehan, analyst at Pretium Securities. The (European debt) situation has not disappeared.
Illustrating the fragility of euro zone finances, five-year credit default swaps (CDS), an insurance-like instrument against debt default, rose to 958 basis points for Greece from 934 bps in New York on Wednesday, CDS monitor CMA DataVision said.
Energy stocks also slipped, pulled lower by a slight retreat in the price of crude. Royal Dutch Shell and BG Group fell 1.5% and 1.9% respectively.
Traders were also focused on technical support levels for the FTSE 100, with trendlines indicating 5,099 would be closely watched, said Phil Roberts, chief European technical strategist at Barclays Capital.
If that level was breached a move below 5,000 would be likely with the next serious support at 4,900, the level it reached at the end of May, Roberts said.
Analysts said austerity measures like those announced by Britain’s finance minister, George Osborne, on Tuesday were adding to the gloom.
“There is a huge bill to be paid off for the measures implemented to help solve the financial crisis, and now that bill’s landing on the mat, and investors are looking ahead to five years of fiscal tightening,” Henk Potts, analyst at Barclays Wealth said.
Banks were also depressed by doubts on the recovery. Royal Bank of Scotland fell 1.7% while Barclays lost 1.3%.
Stocks perceived as relatively immune to economic stagnation like supermarkets and utilities outperformed. Morrison Supermarkets added 1.6%, while National Grid gained 0.9%.
Centrica was a blue chip top gainer, up 2.2% after the gas distributor was added to JPMorgan Cazenove’s Analyst Focus list as its price target was increased.
No important domestic data was released on Thursday, so investor attention was on a batch of US pointers including May durable goods orders and the latest weekly jobless claims, both due at 1230 GMT.