Leading British shares fell on Tuesday as a slide in banking shares overshadowed a rally in mining group Xstrata, which was buoyed by fresh bid speculation. The FTSE 100 of top British shares ended down 28.5 points, or 0.4 percent, at 6,536.9 points, in a day of light trade dominated by anticipation ahead of the US Federal Reserve's policy decision after the European market close.
Economists polled by Reuters unanimously expect the Fed to cut its benchmark federal funds rate by a quarter of a percentage point to 4.25 percent, which would take its total easing this year to a full percentage point, the biggest drop in a single year since 2001.
The Fed is struggling to shore up the broader economy against the slowdown in the housing market and the fallout in the credit markets that stemmed from supbrime lending. Even though a rate cut is fully priced in, shares in major UK banks fell as uncertainty persisted over the outlook for US growth and over the likelihood of more writedowns to come in the financial sector.
"One would hope that we are getting through the pain. The issue I think is more, what is the world going to be like post all the revelations, how are the institutions going to act going forward and that's going to determine in the medium to long term," said Tim Rees, a fund manager at Insight Investment.
"We would put the expectation on a 25 basis point cut. We equally think that the Fed is probably trying to regain the upper hand. To a certain extent, the markets have been pressuring the Fed and leading the Fed." HSBC fell 0.5 percent, Royal Bank of Scotland shed 3.4 percent and Barclays dropped nearly 2.3 percent.
Other interest-rate sensitive sectors also fell. Property companies Hammerson and British Land fell between 2 and 4 percent. Traders said credit concerns, profit taking and news on Monday that New Star Asset Management's flagship UK commercial property fund was under performing were the main drivers behind the decline.
Barratt Developments rose 1.7 percent as expectations grew for another US rate cut and after Credit Suisse raised its rating to "outperform" from "neutral". Xstrata was the among top gainers, rising 2.2 percent after the Financial Times said the world's sixth-biggest mining company was open to talks with potential suitors, including Brazil's Companhia Vale do Rio Doce and Anglo American.
All companies concerned declined comment. Anglo shares fell 1.8 percent. "There is going to be more consolidation in the sector," said Tony Craze, a stockbroker at Dawntraders.co.uk, adding: "I wouldn't be at all surprised. There's no smoke without fire."
But with copper prices mostly flat on the day, most of the miners lost ground, with Rio Tinto and BHP Billiton falling 1.8 and 0.3 percent, respectively. Overnight, Rio challenged BHP to make a formal bid to create a mega-mining house or walk away from what could be the second-biggest take-over ever.
Northern Rock fell another 4.7 percent. The Bank of England rejected a report on Monday that said it would prefer to see the stricken bank nationalised. Northern Rock is also expected to drop out of the FTSE 100 later this month, with analysts predicting that the lender will lead as many as eight companies into the FTSE 250.
Shares in the UK mortgage lender have fallen by almost 100 percent this year after the company fell prey to the credit crunch. Using Tuesday's closing prices, index compiler FTSE will formally announce the changes to the FTSE UK index series after the market close on Wednesday. The index changes will be implemented at the start of business on December 24.
Heavyweight energy shares were the top gainers as US crude futures edged above $89 a barrel. BG rose 3.8 percent, while BP gained 0.5 percent and rival Royal Dutch Shell rose 0.4 percent.
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