Britain's benchmark index ended lower on Tuesday as falling metal and oil prices dragged on heavyweight commodity stocks, while Washington's plan to take control of two mortgage lenders supported banks. The FTSE 100 was down 30.7 points, or 0.6 percent at 5,415.6, well off its day's high of 5,524.8. The UK benchmark is now up 3.3 percent for the week but down over 16 percent for the year.
One day after the US rescue of Fannie Mae and Freddie Mac boosted global equity markets, Wall Street pared gains after a report that showed a steeper-than-expected drop in pending sales of existing US homes in July. "It's the fact that there is a realisation that it was a relief rally (on Monday)," said David Buik at BGC Partners. "It's going to be six to nine months before all the skeletons are out of the banking cupboards."
"Until that happens, you can't honestly say that it's select the next gear and you're on your way to the moon. If we ended up flat, I'd have been quite pleased." US crude dropped to a new five-month low, to weigh on heavyweight oil companies, on expectations Opec would leave formal output targets steady and as the threat of Hurricane Ike to US Gulf of Mexico energy infrastructure receded. Cairn Energy, Tullow Oil, BP and Royal Dutch Shell shed 1.8-7.8 percent.
BG Group slipped 4.3 percent. The gas producer admitted defeat in its $11 billion hostile bid for Australia's Origin Energy, leaving market players to speculate who BG may target next or whether the UK firm will become a target itself. Oil services firm Petrofac slipped 5.8 percent after Deutsche Bank cut its stance to "hold" from "buy" and Goldman Sachs removed the stock from its "conviction buy" list.
Miners were also negative as metal prices edged down. Kazakhmys (KAZ.L, Eurasian Natural Resources, Lonmin, Xstrata and Antofagasta were between 5.7 and 9.3 percent lower. The weakness in energy prices was a lift for airlines British Airways and easyJet and cruise operator Carnival as fuel costs concerns abated.
UK banks pared larger gains made earlier in the session after Lehman Brothers Holdings shares lost more than one-third of their value in the US on uncertainty about the bank's ability to sell its asset management business and raise needed capital. However, they still managed to be the top gaining sector, with Royal Bank of Scotland, HBOS and Barclays tacking on between 0.5 and 3 percent.
HSBC climbed 1.4 percent. Traders noted talk that HSBC could be eyeing troubled Swiss peer UBS although most dismissed this as unlikely. HSBC declined to comment. "You can't rule out that things are going to get worse, but it looks to me as though there are people genuinely believing that with a 12 or 24 month time frame we will be higher from here," said Tom Hougaard, chief market strategist at City Index.
Other UK financial issues also rallied, with insurers Prudential and Legal & General up 3 and 2.6 percent respectively, while insurer and fund manager Old Mutual gained 1.3 percent, all boosted by the recovery in equity valuations. Among individual stocks, negative broker comment knocked drugs blue chip Shire, down 2.7 percent after Goldman Sachs cut its rating to "neutral" from "buy".
British commercial broadcaster ITV was up 4.1 percent on persistent bid speculation and after the broadcaster appointed Ian Griffiths, ex-finance director of publishing and events group EMAP, as its new chief financial officer.