Financials hit by Italian debt fallout

Financial stocks led the London market lower yesterday as Italy’s borrowing costs soared into “bail-out territory”.

The FTSE 100 Index was down 1.9 per cent at 5,460.38 as Italian ten-year bonds soared past the 7 per cent mark to the same unsustainable levels that caused Ireland and Portugal to seek bailouts from the EU and IMF.

Dire UK trade figures revealing a slide in exports to the EU underlined the threat posed by the eurozone debt crisis.

Yusuf Heusen, sales trader at IG Index, said: “At a stock specific level there have been some notable casualties amongst London’s blue-chips, and although Admiral may already be sailing into the sunset, fellow financials HSBC, RBS and Barclays are each sitting at least 5 per cent lower, while Tullow Oil is also dragging down the energy sector following its crude outlook.”

The rise in Italian borrowing costs came despite prime minister Silvio Berlusconi vowing to resign after key budget reforms are passed, a move that initially cheered the markets, with the Footsie up 1 per cent in early trading.

The pound was up against a struggling euro at €1.17, but the weak trade figures in the UK softened sterling against the US dollar at $1.59. The mood in the banking sector, which is exposed to £10.9 billion worth of Italian debt, was not helped by HSBC’s disclosure of a 23 per cent drop in third quarter earnings at its investment banking division.

HSBC shares were 6 per cent or 31.2p lower at 506.3p, while Lloyds Banking Group fell 1.4p to 27.5p after Moody’s warning that the bank’s credit rating was under review because of chief executive Antonio Horta-Osorio’s absence on sick leave.

RBS was down 1.24p at 21.09p, and Barclays shed 9.95p to 172.05p.

Admiral shares crashed 26 per cent after the car insurer said higher-than-normal levels of personal injury claims were likely to dent its profits growth.

Shares slumped by 305.5p to 887.5p after it said current trends suggested 2011 profits were now set to be towards the bottom end of City hopes.

In the FTSE 250 Index, Kesa Electricals lost initial gains seen after it announced a deal to rid itself of loss-making UK chain Comet.

Retail turnaround firm OpCapita is paying a token £2 for Comet, while Kesa will pump £50 million into the business and take on its pension scheme. Shares were 2.8p lower at 99p.

Tullow Oil downgraded its production forecasts for 2011 and said a closely watched well off the coast of Liberia did not find oil in commercial quantities, disappointing investors on two fronts and sending shares 76p lower to 1,360..

Among the Scottish firms, shares in transport giant FirstGroup accelerated 13.2p to 341p after its operating profits improved 25 per cent to £216.3 million on the back of a strong performance in its UK rail division, beating analysts’ expectations.

Another Aberdeen-based company, oil and gas explorer Faroe Petroleum, gained nearly 4 per cent after announcing it had started drilling its T-Rex well in the Norwegian Sea.

The firm owns 30 per cent of the prospect and said T-Rex is a “potential play opener” in the area. Shares gained 5.75p to 153.5p.