Britain's leading share index slipped back on Monday, weighed by weakness in financial issues on fears of a possible debt default by the United States, with investors' attention switching to precious metal miners and defensively-perceived sectors.
At the close, the FTSE 100 index was down 9.76 points, or 0.2 percent at 5,925.26, snapping a four-session rally of over 3 percent, but hanging on to the 5,900 level.
"Even though there are concerns about a US default on its debt repayments the markets seem convinced that a resolution will be agreed before the August deadline," said Angus Campbell, Head of Sales at Capital Spreads. Banks, which led last week's rally, were the biggest blue chip casualties on Monday, with Barclays and Lloyds Banking Group the worst off, down 4.4 percent and 4.2 percent respectively.
US blue chips were 0.4 percent lower by London's close as the political brinkmanship continued in Washington over the US debt ceiling talks. If Congress and President Obama's administration fail to come to an agreement by August 2, the United States will suffer its first-ever major debt default.
"This is the biggest hurdle faced by financial markets at the moment and until common ground is found we can expect volatility to remain high and gains hard to come by," said Capital Spreads' Campbell. British insurers were also weak, led by Aviva down 3.0 percent, with the sector's funds having massive exposure to sovereign debt, and especially US treasuries.
Morgan Stanley strategists also downgraded their stance on Insurance to "equal-weight", taking European financials overall back to that level. "We think until a comprehensive solution to solvency and growth concerns is reached, that ultimately any hope-driven rallies in financials are likely to remain ones to sell into," said Morgan Stanley strategist Matthew Garman.
Conversely, the strategist upgraded his stance on the European pharmaceuticals sector to "overweight", helping drugmakers provide the main underlying strength for the FTSE 100 index. GlaxoSmithKline was up 1.7 percent ahead of second-quarter results due on Tuesday, with traders also citing the impact of a BofA-Merrill Lynch hike in target price to 1,500 pence from 1,400 pence in a preview.
Peer Shire added 0.5 percent ahead of its results due Thursday, with the sector's defensive attractions also in play. Integrated oils also got a boost ahead of the start of the sector's reporting season, with BP and BG Group both up 1.1 percent ahead of second-quarter numbers on Tuesday.
And precious metals groups were in demand as investors looked for relative safety, with Mexican miner Fresnillo the top riser blue chip riser, ahead 2.9 percent. Peer Randgold Resources added 0.5 percent as gold hit a record high on Monday above $1,620 an ounce. Bullish broker comment added support, with Investec resuming coverage of UK-listed gold firms on Monday with a positive outlook across the board, naming Randgold and midcap African Barrick Gold, up 1.3 percent, as its preferred picks. African Barrick will report first-half results on Tuesday.