Will the FTSE 100 Drop Under the Pressure of European Sovereign Debt?

The world stock markets and the euro have slumped on concerns that the European sovereign debt crisis will spread across the continent. Further clouding the financial markets is the fact China has warned against military acts near its coastline, this as a new set of American/South Korean naval exercises take place. Not surprisingly, many traders are worried about the most deeply indebted European nations and this concern is intensifying. The attention is now drifting from Ireland to Spain and Portugal. The crisis seems to be lingering as questions over whether the indebted countries can meet bond payments remain unanswered. There have even been newspaper reports that a majority of Eurozone members and the European Central Bank (ECB) have been urging Portugal to apply for a financial bailout. What does this mean for the European stock markets like the UK’s FTSE 100? A recent Tradefair report said, “The FTSE 100 charts are showing a slow but steady drift lower as the sovereign debt issue plays out in the glare of the media, however it should be noted that the current global economic indicators still appear rather positive. “Admittedly, Portugal, Ireland, Spain and Greece will probably suffer. No doubt the UK will also suffer when the budget cuts start to impact. Nevertheless this does not detract from the fact that the FTSE 100 constituent companies are trading in a global market. In fact, with a relatively weak pound, overseas earnings look ever more valuable. “At some point a solution will be found to solve the problems of the European peripheral countries and that solution will be more money. It may also hit bond holders as they are asked/told that the value of their bonds have just been reduced.” Looking in more detail, it will be interesting to see who takes the bigger hit as all the buyers of Irish and Spanish bank debt may soon be told that their bonds are now worth a good deal less. If that happens then the senior-debtors will expect sub-debtors to be wiped out before they are asked to take any losses. Looking at the technical analysis of the FTSE 100, a recent City Index report showed that “The momentum index is still lower and, with the UK 100 below its 20 day moving average, the opportunity still remains for the bears to test a lower level at 5491. “On the other hand, if the FTSE can hold above the 5705 mark and the momentum indicator rises, then the current decline shouldn’t cause any concern, in the short term at least, for the bulls.” With financial spread betting you can lose more than you initially invested. Financial spread betting carries a high level of risk to your capital. Ensure that spread betting matches your investment objectives. Familiarise yourself with the risks involved. Where necessary, seek independent advice.