In a note called ‘Italy: contagion or panic?’, Collins Stewart analysts said: “Whether you believe Italy is a serious candidate for medium-term sovereign default, or the surge in Italian sovereign yields to 5.67pc represents a panic that will pass, there is no question that foreign claims on Italy by the global banking sector are huge, and in particular the sovereign exposures per se.
“At $262bn (£165bn), the foreign sovereign claims on Italy exceed the combined foreign sovereign claims of banks on Greece, Ireland, Portugal and Spain combined,” added the broker, pointing out that by contrast, interbank exposures of $148bn are less than two-thirds the size of Spain’s $226bn. Private sector exposures of $457bn compare with $380bn for Spain.
Having stressed that all of the figures were “gross and as such overstate the actual economic exposure” and that “as of today, almost all of the Italian exposures are credit-worthy and performing,” the analysts went onto say that European banks account for 84pc of sovereign exposure to Italy. They calculated that UK banks had a sovereign exposure of $11.5bn.
Of the European banks covered by Collins Stewart, the broker said that Standard Chartered “looks most immune to potential Italian woes”. Despite that, Standard Chartered fell 27p to £16.00½.
By contrast, Collins Stewart said BNP Paribas and Barclays have “substantial retail and wholesale exposures to Italy”.
Even though most of these exposures are currently credit-worthy and should remain so if the panic passes, Collins Stewart thought uncertainty could keep up pressure on BNP Paribas’ and Barclays’ share prices.
Barclays dropped 6.3 to 227.65p. The bank’s decline was mirrored by the wider market, which endured a volatile day amid concerns that debt contagion could spread to other countries in the Eurozone.
London’s benchmark index tumbled as much as 2.3pc in morning trading, but later recovered some of its composure after an Italian bond auction was well received by the market and the country’s prime minister, Silvio Berlusconi, pledged to hasten the passage of Italy’s deficit reduction plan.
However, the FTSE 100 still finished 60.2 points lower at 5868.96 while the FTSE 250 lost 102.04 points to 11778.02.
As the blue-chips headed into the red, analysts at Credit Suisse upgraded their rating on UK shares to “overweight” from “benchmark”. They said that monetary conditions in the country were the loosest of any region and are likely to stay loose, adding that they see “a 50pc chance of QE2 by year-end”.
Equities looking more positive included defensive stocks such GlaxoSmithKline, with the drug maker ticking up 7½p to £13.65. Leading the charge, however, was Burberry as the maker of handbags and trench coats put on 23p to £14.37. Not far behind was Marks & Spencer, which ticked up 4.3 to 373p, as investors pinned their hopes on a positive trading update on Wednesday.
Keeping their “buy” rating, analysts at Seymour Pierce, said: “The first quarter trading statement is expected to be reasonably reassuring despite a difficult backdrop.
“Trading would have benefited from a relatively buoyant April helped by the late Easter and royal wedding, while May was weak and June would have been boosted by the early sales.”
SuperGroup is also due to report on trading, with its full-year results set to be unveiled on Wednesday. But the streetwear retailer slid 47½ to 877½p.
Some of SuperGroup’s mid-cap retail peers were faring better, with Kesa Electricals and Dixons Retail ticking up 6.6 to 142.9p and 0.89 to 15.54p respectively. Kesa, which owns the Comet chain of electrical stores, was given a fillip by analysts at Investec upping their rating from “sell” to “hold”.
Although the broker was sceptical about Kesa’s “commercial strategy for its weakest links”, including Comet, Investec raised its rating given the better cash position and pension deficit.
At the other end of the spectrum, Thomas Cook tumbled 34.85 to 87.85p after the tour operator warned that full-year profit would be lower than hoped as tough conditions in Britain and unrest in the Middle East and North Africa hit trading.
Its peer, TUI Travel, slid 16½ to 204.7p in sympathy.
Back on the top tier, ARM Holdings was the sharpest faller. The designer of microchips for gadgets such as Apple’s iPhone declined 31 to 596½p after Microchip Technology, a US maker of analog chips, said sales and profit did not meet projections because of weaker demand from car and computer manufacturers.
Also, Novellus, a maker of machinery used in semiconductor production, forecast third-quarter revenue and earnings that fell short of analysts’ estimates.
BSkyB declined too as traders continued to react to concerns that a bid by News Corporation to take over the rest of BSkyB that it does not already own could be derailed. After the Government referred the bid to the Competition Commission, analysts at Credit Suisse cut their price target to 650p from 870p, saying they “now believe there is only a 10pc chance News Corp’s attempt to take full control of Sky will eventually be successful.”
BSkyB dipped 23½ to 692p, and among the mid-caps, Daily Mail & General Trust eased 4 to 444.1p despite Panmure Gordon speculating that a move by News International to sell its remaining UK newspapers – such as The Sun – could be “very positive” for the owner of the Daily Mail.
Slipping back too was Premier Oil. The oil and gas explorer shed 21 to 413.8p after saying it expected a lower output for the first half of the year as maintenance work outweighed a good performance from its Indonesian field.
Among the small-caps, Yell jumped 1.51 to 11p after the publisher of Yellow Pages said it had struck a tie-up with Microsoft to offer online advertising products to increase its presence in digital media.
On Aim, iEnergizer leapt 9½ to 205p after the supplier of back office outsourcing systems posted its maiden set of annual results. iEnergizer, which listed on London’s junior market last September, said revenue had risen 41.7pc to $49.36m.
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