Caution ahead of US results pulls FTSE 100 to a flat close

BRITAIN’S top share index closed flat yesterday, with caution from traders wary of turbulence during the US earnings season offset by strength in the banking sector following the ICB report on the future shape of UK banking.

The FTSE 100 closed down 2.31 points, or 0.04 per cent, at 6,053.44 after trading in positive territory for most of the day. The index hit its highest closing level since mid-February on Friday.

“The market will be very cautious of any indication of a loss of earnings momentum,” said Mike Lenhoff, chief strategist at Brewin Dolphin, which has £25bn of assets under management.

“Given the higher commodity prices, we could actually see some high profile earnings disappointments, the market is a bit hesitant at this stage and does not want to sally forth and is holding back.”

Traders also said inflation data from the US, Eurozone and UK this week could be the deciding factor in determining market direction over the next few days.

Banking stocks were in demand after the core Tier 1 capital level recommendations in the UK’s Independent Commission on Banking report were not as bad as expected and the ring-fencing of retail operations looked less onerous than the sector feared.

“The Basel III Core tier 1 ratio of 10 per cent is not the 15 per cent to 20 per cent some suggested,” said Christopher Wheeler, banking analyst at Mediobanca.

Barclays, on which Wheeler has an “outperform” rating and said “looked comfortable” by the new Core tier 1 ratios, rose 2.8 per cent. RBS was up 2.3 per cent, putting both banks among the top blue chip risers.

However, analysts said the proposals were harsh for Lloyds Banking Group, which may have to sell hundreds more branches, with Wheeler noting the bank “may get less for selling branches now”. Lloyds was up 0.3 per cent.

Elsewhere, miners were given a boost after Credit Suisse upgraded BHP Billiton to “outperform” from “neutral” on the back of strong Chinese demand and said Xstrata and Rio Tinto remained its “core structural picks”.

BHP Billiton, Xstrata and Rio Tinto gained 0.1 to 1.8 per cent. GKN rose 1.1 per cent after the British plane and car parts maker said it expects continued strong trade from its land systems business, with Investec Securities reiterating its “buy” rating on the stock.

Cairn Energy rose two per cent, after falling last week on further delays to its deal with Vedanta.

On the downside, WPP, the world’s biggest advertising group, fell 1.9 per cent, hit by a negative outlook from media buyer ZenithOptimedia and a bearish sector note from UBS.

Luxury retailer Burberry was also at the bottom of the pack yesterday, losing 2.03 per cent following a powerful aftershock in Japan, one of its biggest markets. The firm’s shares have been badly hit by the Japanese disaster.

Intercontinental Hotels fell back 1.48 per cent following a broker downgrade.

Outside of the top flight, CPP tumbled 14 per cent after Barclays terminated a key contract with the credit protection firm.

Beleaguered small-cap healthcare firm Southern Cross tanked 13.3 per cent, as it prepared for talks with landlords to cut its rental bills.