The FTSE 100 Index fell almost 2% today as momentum faded following Monday’s 5% surge.
Relief over European efforts to prop up the euro fizzled out while political uncertainty lingered in London as the prospect of drawn out coalition talks grew.
The Footsie was 93 points lower at 5294.4 following its best session for 18 months on Monday, with similar losses seen across European exchanges.
Wall Street’s Dow Jones Industrial Average finished almost 4% ahead overnight but Asian markets failed to sustain the rally, with Hong Kong’s Hang Seng down 1.4% and the Japanese Nikkei off 1.1%. Futures markets also indicated a lower opening for US markets later today.
David Jones, chief market strategist at IG Index, said: “It is maybe not too surprising that some investors have viewed the remnants of Monday’s bounce as an opportunity to sell and sit things out for now.”
Despite the political drama, the latest sale of UK gilts was two and a half times oversubscribed and manufacturing figures showed the sector growing at its fastest pace for eight years in March.
The pound however fell below 1.48 against the dollar as markets sensed a pact between Liberal Democrats and Labour – a hung Parliament scenario unpopular with the City – was growing more likely. Sterling was steady at 1.16 against the euro.
Several of the stocks which made double-digit gains on Monday were on the back foot. Royal Bank of Scotland – downgraded by Deutsche Bank – fell 2.5p to 49.2p or 5%, while Barclays was 12.35p down at 317.25p.
Xstrata meanwhile led a host of miners lower, falling 67p to 1025p as metal prices took a breather from their strong previous gains.
In corporate news, Thomson Holidays owner TUI Travel was 8.6p down to 250.1p after revealing a £90m dent to profits from the volcanic ash cloud but holding its full-year guidance.
Rival Thomas Cook fell 4p to 222.3p, while in the FTSE 250 budget airline easyJet – which downgraded its own annual profits forecasts this morning - slipped 18.7p to 423.5p.
Pubs group Enterprise Inns was heading the other way in the second tier, with shares up 11% or 13.6p to 135.7p after a refinancing deal eased concerns over its balance sheet.
Signs of stabilising trading despite challenging conditions also helped rival Punch Taverns gain ground, up 1.7p to 80.7p.