FTSE rally proves short-lived

A bleak warning from Bank of England governor Mervyn King, eurozone uncertainty and worse-than-expected US unemployment data ended the rally on the London market today.

The FTSE 100 Index closed 16 points lower at 5489.3 after spending much of the session in the black, following yesterday’s coordinated action by central banks to ease the credit crisis.

But the mood soon dampened when Sir Mervyn, sitting in his role as chair of the interim Financial Policy Committee (FPC), warned of the severity of the eurozone crisis and urged banks to boost capital levels to protect against future financial crises.

Meanwhile, the US Labor Department revealed weekly jobless claims spiked above 400,000 for the first time in several weeks, reigniting concerns over the health of the world’s largest economy.

The pound was hit by the FPC’s gloomy assessment and fell against the US dollar to 1.56 and the euro at 1.16.

In its report, the FPC revealed UK banks’ exposure to government debts of the so-called vulnerable five – Greece, Portugal, Italy, Spain and Ireland – was revealed at £14.8bn, according to the committee’s report.

This hit the beleaguered banking sector, with Lloyds off 0.8p at 24p and Barclays fell 3.1p to 177.2p, while Royal Bank of Scotland was down 0.4p at 20.6p.

Sentiment was also impacted by a survey showing the first fall in activity in the Chinese manufacturing sector for three years. There were also warnings that the UK manufacturing sector faces a bleak winter after the Markit/CIPS purchasing managers’ index for November showed a further decline.

The biggest Footsie risers were Resolution up 9.1p at 244.7p, Burberry ahead 38p at 1308p, International Airlines Group up 4.1p at 151.6p and Kingfisher ahead 5.7p at 261.3p.

The biggest Footsie fallers were IMI down 39p at 759p, Lloyds Banking Group off 0.8p at 24p, ICAP down 11p at 344.3p and Lonmin off 33p at 1037p.