Daily market snapshot: Weak US trading prompts FTSE fall

European and UK stocks opened down this morning, with the FTSE 100 losing 1.1%, reflecting the weak performance of US markets yesterday.

Disappointing results from telecoms producer Ericsson pushed the stock down 8.8% and also affected competitors, such as Alcatel-Lucent, down 3.5%. Lloyds banking group fell 2.0% as the Financial Times reported that the bank is looking to undertake a rights issue and refinancing.

US stocks closed down yesterday, with the Dow Jones and S&P 500 falling 0.9%, despite financial stocks delivering profit surprises.

Investors appeared to book profits as the S&P 500 reached 1,100, while Wells Fargo fell 5.1% following a negative broker comment, despite reporting record third quarter profits.

Previous working day closing figures:
Dow Jones: 9,949.36
FTSE All-Share: 2,700.23
FTSE 100: 5,257.85
FTSE 250: 9,421.04
FTSE AIM: 674.62

Market snapshots (at 10:27):
FTSE All-Share: -1.51%
FTSE 100: -1.57%
FTSE 250: -1.20%
FTSE AIM: -0.70%

Thoughts (with Henderson New Star)

To counter the growth of "possibly the biggest moral hazard in history", Mervyn King has called for banks to break up into distinct and separate retail and investment banks. When such a call comes from the Governor of the Bank of England, and with the support of the Conservative party (which could be in government after the general election next May), many banks' CEOs will be forced to take notice.

It is unlikely though, that such a separation of retail and investment banking would have prevented the problems that affected UK banks. Northern Rock and Bradford & Bingley required government intervention, yet they had no investment banking business; RBS failed due to overpriced acquisitions and holding toxic assets and the enforced Lloyds HBOS merger was not driven by taking on huge risky trades.

The reasoning behind such break-up calls is rather that if these institutions had been smaller when they experienced difficulties, it would have been possible to let them fail and not require governments to spend to avoid a system collapse. The threat of failure should force banks to run a more conservative business model and expose themselves, and the economy, to less risk.

The current government and the Financial Services Authority have dismissed the break-up proposal as ‘difficult and impractical'; however, there is complete agreement that action must be taken to ensure that bailouts will not be required in the future, and it is important that a structure is in place before the next bank gets into trouble.