Markets fail to rally after France downgrade rumour

Stock markets this morning failed to bounce back from the massive sell-offs yesterday despite strong denials of the rumours about France that triggered those falls.

Although share indices rose as much as 3% earlier in the session, by 11am those gains had all but petered out to nothing.

Nicolas Sarkozy, the French president, demanded new cuts from his ministers to stave off rumours of a downgrade in its credit rating, but the action had little impact.

France's CAC-40, which crashed 5.5% yesterday, fell further into negative territory just before lunchtime, falling 25.93 to 2977. The FTSE-100 Index, which peaked for the day at 5125, was up just 1.75 points at 5008.91.

Lloyds TSB economist David Page said: "With high levels of uncertainty politically and economically wherever you look, this is a market that is primed for falls."

Société Générale, which was the biggest target of yesterday's rumour mill, falling more than 20% at one stage, continued its slide today after a short-lived rally. Its shares were down 2.4% at lunchtime with BNP Paribas, also targeted yesterday, down 5%.

Analysts are calling for strong action from German political leaders to strike a strong political fix to the eurozone crisis. Effectively, an extension from Germany of the European Financial Stability Facility is what many investors are now seeking.

As one bond strategist said: "It will cost Germany, and France, a massive amount - possibly even resulting in credit downgrades for both. But at least then we'd have some certainty. What this market needs more than anything is clarity."

As concerns about the eurozone crisis dragged on, there were growing signs that banks were becoming increasingly concerned about lending to each other again. Analysts said they were becoming increasingly fearful of lending to banks with big exposures to Italy, Spain and Greece. Several types of derivatives markets were indicating today that banks were hoarding funds to protect themselves against further volatility in an, albeit small-scale, reminder of the banking crisis.

One senior trader at a major bank said his desk had curtailed lending to a few other European banks beyond a few days or a week. He said that mirrored moves by other banks.

"There is no denying that accessing funds is hard for certain European names. But we are very far away from the panic times of 2008," said one fixed income trader to Reuters.