Why the Footsie is crashing again

Updated: 
FTSE 100Last November, I warned that the only thing driving stock markets in 2011 was "politics and, to be specific, euro-zone politics."
Six months later, I continue to hold this view. This year, share prices continue to being pushed around by political plots, rather than company fundamentals, liquidity or economics.

FTSE 100 flops again
In the first quarter of 2012, Mr Market's mood turned increasingly positive, largely thanks to €1 trillion of ultra-cheap loans dished out by the European Central Bank. As a result, the blue-chip FTSE 100 index of elite British companies hit a 2012 closing high of 5,966 on Friday, 16 March.

Almost two months on, the Footsie has taken a big slide. Right now it stands at 5,460, down 115 points (2%) on Friday's close.


Furthermore, this latest slide means that the UK's main index has dropped by more than 500 points in two months, which is a dive of 8.5%. Hence, it looks as though the second quarter of this year will be as negative for investors as the first quarter was positive.

A Greece-y mess
As I said, the current weakness in share prices is down to politics and, specifically, euro-zone election results that have made investors increasingly nervous.

Right at the top of this 'fear list' is Greece, which went to the polls on Sunday, 6 May. In a widely anticipated result, the ruling coalition won under a third of the vote, with anti-bailout candidates on the left making strong gains. Worryingly, the far-right, fascist Golden Dawn party took 7% of the vote.

Eight days later and Greece has yet to form a government, despite politicians burning the midnight oil in near-constant talks for the past week. The worry now is that, having held an inconclusive election, Greece will have to return to the polls for another round of voting.

What's more, there is some remarkable rhetoric coming out of Greece. Leaders of the far-left, anti-bailout Syriza party -- which came second in the election -- tell of a fabulous fantasy whereby Greece can default on its latest €130 billion bailout without leaving the euro zone.

On hearing this news, Mr Market responded by driving down the Athens General Index to 583, down almost 5% so far today.

Germany versus France
Elsewhere in Europe, the election of François Hollande as France's first Socialist president for two decades put France on a collision course with Germany.

Hollande -- who campaigned as an anti-austerity and anti-finance candidate -- has promised to increase France's social spending, abandon austerity cutbacks and renege on the EU's fiscal responsibility pact. This puts Hollande on track for a head-to-head collision with Angela Merkel, the German Chancellor fervently committed to austerity and responsible bailouts.

Clearly, cracks in the alliance between Europe's two biggest economies only add to the fear washing through European stock markets. As a result, the German DAX index has dipped another 2% today, while France's CAC 40 index is down 2.3%.

Suffering S-pain
After Greece, the euro-zone country suffering most pain is Spain, which is, quite frankly, in a shocking state. With the Spanish economy shrinking by 0.3% in the final quarter of 2011 and again in the first quarter of this year, an unemployment rate close to a quarter (24.4%), and house prices crashing by 50% or more, Spain's banks are basket cases.

Right now, Spain looks to be in as big a mess as bailed-out Ireland, but on a far bigger scale. For example, it's estimated that half of Spanish property loans (a total of €184 billion) have turned toxic.

Hence, the Spanish government has taken steps to shore up its major banks, taking a substantial state stake of 45% in Bankia, Spain's third-largest bank after Banco Santander and BBVA. However, Spanish banks may need capital injections totalling perhaps €30 billion, part of which may have to come from the state in the form of more partial nationalisations.

Nevertheless, until the Spanish government faces up to its chronic financial problems and seeks a safety-net from the European Financial Stability Facility (EFSF) or International Monetary Fund (IMF), Spain's pain is surely set to continue.

Credit where credit's due
Finally, one way to see these national strains is to compare the 10-year bond yields of the major economies. Here they are, from lowest to highest yield, courtesy of the Financial Times:

Country10-yearyield (%)
Japan 0.84
Germany 1.44
US 1.79
UK1.86
France 2.83
Italy 5.92
Spain 6.30
Portugal 11.08
Greece 27.92


While the UK is enjoying the lowest borrowing costs in the history of our state borrowing, Italy is paying a fixed yearly rate of nearly 6% to borrow over a decade. For Spain, this rate is 6.3%, while Portugal (yielding over 11%) and Greece (nearly 28%) have to offer danger money to bond buyers.

Right now, investors seem to have eyes only for ultra-safe, low-yielding bonds issued by the likes of Germany, the US and the UK. Until this 'risk off' mentality changes, share prices look set to go lower still.

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