Britain's FTSE 100 retreated from half-year highs on Monday, in what strategists said was likely to be a profit-taking pause in a three-month-long rally stimulated by global central banks. The benchmark share index has risen some 12 percent since the start of June, propelled by expectations of central bank action that took effect in the last two weeks.
The US Federal Reserve announced a third round of quantitative easing last week, following the European Central Bank which outlined bond-buying plans early in the month. But hurdles still remain, not least the need for Spain to formally ask for help and agree to stringent terms before the ECB can start buying its bonds - something Spanish Prime Minister Mariano Rajoy seems in no hurry to do.
"We do believe it will be positive for risk assets in the shorter term but there are some issues," said James Butterfill, equity strategist at Coutts. "Perhaps the market is being cautious ... (because) it seems that Rajoy is not willing to ask for any form of bailout and perhaps in order for Spain to ask for any kind of bailout the markets will have to force it."
Tensions in the Middle East also weighed, traders said. The United States and its allies launched a major naval exercise in the Gulf in a bid to keep oil shipping lanes open as Israel and Iran traded threats of war. The FTSE 100 closed down 22.03 points or 0.4 percent at 5,893.52 points, erasing less than a third of the previous session's jump on news of the Fed's plans to pump $40 billion a month into the world's biggest economy.
That rally took the UK index to its highest level since late March, at 5,932.62, on Friday. But it has also nudged it into overbought territory, defined as a reading above 70 on the relative strength index. The 7-day RSI was at 74 on Monday. From a technical point of view, that opens the door for a pull-back over coming days before the rally resumes. "The target of 6,000 remains quite realistic within the next week. But in the near term there is more probability of a correction because the move was quite sharp," said Dmytro Bondar, technical analyst at RBS, adding that the index could dip back to around 5,800 points.
The sectors that posted the strongest gains during the rally were the biggest hit on Monday, with miners down 1.4 percent and financials also suffering. Direct exposure to euro zone sovereign debt has made the banking sector particularly sensitive to swings in sentiment on the region, with the latest pick-up in risk appetite potentially leaving some lenders more expensive than fundamentals justify. Valuations prompted Investec to downgrade RBS - which has added 21 percent this month alone - to 'sell'.
The recent gains have pushed up valuations, with the 12-month forward price/earnings ratio on the FTSE 100 rising to around 11.5 times at the end of August from under 9 times in June, according to Thomson Reuters Datastream. Butterfill at Coutts said that the FTSE 100 has already reached his implicit target for the year of around 5,885. "A lot of this good news surrounding policy is priced (in) and what we need to see is some improvement in corporate data for it to really validate this recent move," he said.
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