Dim view of banks puts the brakes on FTSE 100’s rally

BRITAIN’S top shares eased back from last week’s 2012 highs yesterday, as weakness in banks after recent strong gains overshadowed a late-session recovery from miners, with investors awaiting the next catalyst to drive the market.

The benchmark FTSE 100 index closed down 4.47 points, or 0.1 per cent, at 5,961.11.

Banks, which spearheaded the FTSE 100’s recent jolt higher in the aftermath of last Tuesday’s US bank stress tests, went into retreat after London-listed lenders neared overbought levels, according to their relative strength index.

Banks last week outperformed the other major sector indexes on the FTSE 100 by a considerable margin, advancing 5.2 per cent.

Sentiment in the sector was hurt as KPMG said banks faced more pressure on profits, and Barclays Capital forecast investment banking earnings to be down 15-20 per cent this year.

Mining stocks clawed back losses from earlier in the day to end in positive territory, tracking copper prices higher, as recent encouraging US economic data overshadowed fears about demand from top consumer China, for now.

Hurting the miners, the key property sector in China has cooled. Its home prices are down in February from January for a fifth consecutive month, and are expected to continue heading south in coming months.

“The demand picture for global commodities worries me and does point to a slowing Chinese economy, which I find more significant than improving data from the US, so I remain very cautious,” said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500m of assets.

Uncertainty over the outlook for China, in fact, prompted a downgrade on miners from JPMorgan – to “neutral” from “overweight” – with the bank urging some profit taking after the sector’s outperformance in the year to date.

National Grid was a significant faller, off 1.9 per cent, after BofA Merrill Lynch downgraded its rating on the energy distributor to “neutral”, partly on valuation grounds, in a broadly bearish note on pan-European utilities.

BofA Merrill Lynch said National Grid’s shares, which recently broke through its 640p price objective, helped by its defensive characteristics and emerging clarity on regulation and dividend safety, may mark time until the end of the year.

The bank said progress in the RIIO (a new system which UK regulator Ofgem will implement to render Britain’s energy network more sustainable) review has been encouraging so far, and it still bets on an acceptable final outcome in December.

“Nevertheless, the initial proposals due in July are unlikely to represent the regulator’s best offer, and we cannot preclude some uncertainty.”

BT Group was a good gainer, up 0.8 per cent, after the Sunday Times reported the telecoms firm was preparing to put up to £1.5bn into its pension fund in an effort to tackle a huge shortfall – and clinch a multi-million-pound tax credit.

Oriel Securities estimated cash benefits of a large, early top-up payment are a £22m early payment saving and £6m savings because the UK corporate tax rate is set to reduce from 26 per cent in 2011-12 to 25 per cent in 2012-13.