Britain's top share index closed 0.7 percent lower on Tuesday as commodities and banks led the retreat over concerns that China's move to tighten banks' reserve requirements may slow global economic recovery. The FTSE 100 index closed down 39.36 points at 5,498.71, dropping back after hitting a 16-month intraday peak at 5,600.48 on Monday.
China's central bank surprised markets with a 0.5-percentage point hike in banks' reserve requirement in a clearest sign yet of monetary policy tightening. "The move is designed to control the excessive growth and therefore seen as likely to impact demand and hamper recovery and that is always going to have an effect of riskier stocks," said Jimmy Yates, head of equities at CMC Markets.
Miners, which have outperformed the wider blue chip recovery, were the hardest hit as fears over demand for metals saw raw material prices fall across the board. The sector also suffered a setback when aluminium firm Alcoa unofficially kicked off the US fourth-quarter earnings season with a whimper, announcing disappointing fourth-quarter results overnight.
Vedanta Resources lost 3.2 percent, also hit by a Deutsche Bank downgrade to "hold" from "buy", while Fresnillo, Eurasian Natural Resources, Kazakhmys and Rio Tinto shed 1.8-5.2 percent. "Alcoa's numbers have dampened the mood and left many feeling rather more nervy about the earnings season," Yates added.
Energy issues also felt the impact of China's move which offset the strong trade numbers reported by the country on Monday, as the greenback held firm against a basket of currencies, while crude fell below $82 per barrel. Royal Dutch Shell, BP, Cairn Energy and Tullow Oil fell 0.3 to 2.5 percent.
Banks were knocked further as well, having earlier been hit by reports that US President Barack Obama is considering levying a tax on the sector, according to the New York Times. Standard Chartered, Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays lost 0.1 to 2.5 percent. Among individual fallers, SABMiller shed 1.3 percent, as Nomura cut its rating to "reduce" from "neutral" after the brewer lost out in an acquisition opportunity to rival Heineken.
Few sectors made it into positive territory but life insurers bounced back from Monday's sell-off within the sector as investors went bargain hunting. Standard Life, RSA Insurance, Aviva and Prudential were up 0.4 to 1.2 percent. Supermarkets were also higher, supported by news that Tesco , the world's fourth-biggest retailer, smashed Christmas sales growth forecasts in its main British market.
Tesco was up 0.8 percent, while peer WM. Morrison added 1.1 percent, helped again by a Nomura upgrade on Monday, and J Sainsbury gained 0.5 percent. However, the picture was not so rosy for other retailers who were unable to repeat the success of their blue chip peers. Mid-cap computer games retailer Game Group issued a profit warning following poor Christmas sales, while department store retailer Debenhams reported flat sales.
Their shares fell 5.6 and 4.5 percent respectively. Elsewhere, other selected defensive issues were in demand as investors' risk appetite waned, led by telecoms, and healthcare firms. BT Group gained 1.2 percent and medical products firm Smith & Nephew firmed 1.1 percent.
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