Credit concerns saw banks lead the FTSE 100 into the red today, despite intervention from the Bank of England. After a volatile morning, the blue-chip index was down by as much as 61 points - at 6,311 by lunchtime.
Banks take another battering
A broker downgrade from Lehman Brothers saw mortgage banks Northern Rock and Bradford & Bingley tumble today. Lehman Brothers Analysts pointed to the effect tighter credit and uncertainty' were likely to have on earnings within the sector. Northern Rock, the worst performing bank so far this year, was down over 3% following the cut to underweight'. And Bradford and Bingley was down by as much as 2.4%.
Lender Alliance and Leicester, which went ex-dividend today, was one of the day's heaviest fallers despite issuing a reassuring statement yesterday. And banks Lloyds TSB and Royal Bank of Scotland were also down by as much as 1.2% and 1.5% respectively.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Bank of England takes action on credit crunch
The Bank of England's first action on the credit crunch was as much a cause for concern as it was reassurance. In a note issued at 11am today, the Bank offered an extra 25% cash, in addition to the £17.6bn already requested by banks for next month, in order to relieve pressure on inter-bank borrowing rates.
The announcement appeared to have the desired effect. The Libor (the London inter bank overnight rate) fell to 5.91 from 6.11 following the news. However, the Bank's intervention in the market is minimal compared to its US and European peers who have cut rates and injected cash into the credit markets in order to boost liquidity. And the BoE indicated today that investors should not expect any additional action.
That banks remained reluctant to lend to one another was demonstrated by the three-month rate Libor, which remained at 6.8 today, its highest since the aftermath of the Long Term Capital Management collapse in December 1998. As Capital Economics' Jonathan Loynes told Bloomberg, Longer term rates are likely to remain elevated until wider credit worries start to diminish'.
Miners up, gold and sterling down
Elsewhere in the market, it was a good day for mining stocks as Merrill Lynch raised its long term forecasts for metals including aluminium, copper and zinc.
Gold had fallen to $679.25 as investors took profits and silver had fallen to $12.22.
Crude had edged up to $75.24 and Brent spot had jumped to $74.91 in London.
And in the currency markets, the pound was down to 2.0098 against the dollar and 1.4798 against the euro ahead of tomorrow's interest rate decision.
