Britain's top share index limped to a flat finish on Friday, with a wave of profit-taking on options and futures expiry eclipsing any sentiment boost from signs that Spain may be getting closer to asking for a bailout. The FTSE 100 closed down 2 points at 5,852.62, taking it to a 1.1 percent weekly loss after two consecutive up weeks.
Some holders of September call options - which give the right to buy the index at a pre-set price - decided to cash in when they expired at 0915 GMT, taking advantage of an 11 percent rise in the FTSE 100 index since the start of June. As a result, brokers, which had been holding the underlying index longs on the other side of the trade, also liquidated positions, pushing the FTSE 100 sharply lower at the expiry and keeping it subdued for the rest of the session.
But losses were capped by signs that Spain is moving closer towards asking for a bailout that most investors think is key to resolving the euro zone crisis. "It (options expiry) is obviously providing a great deal of volatility in the market," said Zeg Choudhry, head of equities trading at Northland Capital Partners.
"People have still been focused on the global slowdown, but there is no de-risking, there is just profit-taking and I think we are in for a rally on the market over the next two quarters." The biggest faller was Xstrata, down 4.2 percent after another delay in its planned merger with trading house Glencore. The miner has secured an extra week to say whether or not it will recommend the Glencore offer to its shareholders.
This week's correction in the broader UK market follows a strong run early this month thanks to the promise of more stimulus from the US Federal Reserve and the European Central Bank. But caution has returned this week, with weak Chinese data highlighting the failing health of the global economy. "Should the positive effects of central bank action continue to wane, we will perhaps look for opportunities to take profits from recent gains," Simon Reynolds, fund manager at Octopus Investments, said in a note.
The rally has pushed up the price/earnings ratio on the FTSE 100 to a one-year high of around 10.5 times from below nine times in early June, according to Thomson Reuters Datastream. "Valuations in the UK are close to long-run averages ... The earnings outlook remains sanguine and whilst labour costs and the tax environment are improving the FTSE is very exposed to global growth, due to its exposure to the highly cyclical materials sector and the majority of earnings are sourced from abroad," said James Butterfill, strategist at Coutts. "Therefore the UK is unlikely to perform until global growth concerns abate."