Britain's top share index eased for a second day on Tuesday, retreating further off recent six-month highs on uncertainty over whether steps taken by the US and Europe will be enough to kick-start the global economy. In UK's top trading partner the euro zone, a big hurdle is Spain. Madrid's reluctance to make a formal request for help, which is needed to activate the European Central Bank's bond buying plan, has pushed up Spanish bond yields and increased risk aversion.
"The markets are uncertain what's going on in Spain," said Max Bascombe, institutional sales trader at Merchant Securities. "Nothing goes up in a straight line, there is still a lot of money out there but opportunities will have to be very good to get people to part with their cash ... People are saying that now I've made a bit of money, I will take a bit of profit."
The FTSE 100 closed down 25.36 points, or 0.4 percent, at 5,868.16, led lower by miners and banks, the stars of the recent rally fuelled by the US Federal Reserve's third round of quantitative easing and the ECB's bond buying plan. The rally has pushed the FTSE to six month highs and has left some companies' valuations looking stretched, putting analysts on the downgrade path. Aviva was the latest victim, downgraded on Tuesday by Nomura and Bank of America Merrill Lynch, with the latter saying it looks "fully valued".
Insurers and banks shaved around 15 points off the FTSE 100. The star performers, on the flip side, were defensive sectors like tobacco, which do well in tough economic times but had lagged during the rally. Strategists said that based on historic responses to stimulus and on the relatively light positioning in equities after months of risk aversion, the rally could run further, with the current retreat more likely a pause than a reversal.
Investec Asset Management is sticking to a "firmly risk on" stance adopted in August, said portfolio manager Max King. "The earnings stories are turning around slowly. The market is going to run and fundamentals are going to follow," he said, naming gold miners as a top pick for risk-seekers. Investors wishing to bet on a continued rally could buy December 2012 call options on the FTSE, which would profit if it moves above 6,000 points, said UBS derivatives strategists.
The FTSE should benefit from the rally thanks to its relatively high exposure to basic resources, which do well at times of rising risk appetite, and because it has lagged other European indexes so far this year, UBS said. In the short-term, though, technical strategists said the UK index could ease to 5,775-5,800 points before the rally resumes.
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