FTSE 100 ends higher after defensives lead a relief rally

BRITISH blue-chip stocks rose to buck a three-session slide as dividend-yield hunters ploughed back into beaten-down defensive stocks, albeit in low volume, volatile trade that could have further to run, traders said.

Vodafone, Royal Dutch Shell and GlaxoSmithKline added most points to the FTSE 100 index yesterday as the recent fall, which took six per cent off Europe's leading equity market, drew in bargain hunters.

“Buying interest is favouring the safe havens, and specifically the higher-yielding stocks,” Andy Ash, head of sales at Monument Securities said, as the dividend yield relative to that on offer in the bond markets was "historically very attractive".

The dividend yield on the FTSE 100 is currently around 4.3 per cent, according to Thomson Reuters data, and income funds were among those taking advantage, buying stock and selling out-of-the-money calls to enhance the yield, Ash said.

In the short-term the market had found a trading range between 5,000 and 5,500, he added as "yield buyers were happy to buy the market" at the lower level, while macroeconomic concerns provided resistance.

As a result, the market would likely "whipsaw between these levels ... over the next two or three weeks", Ash said.

The UK's premier index closed the day up 1.1 per cent at 5,095.30 points, in the middle of its trading range, although volumes were just 80 per cent of the 30-day daily average, with many traders away from their desks for the summer break.

In spite of the session gain, the index remains down 12 per cent so far in August and 14 per cent year-to-date, weighed by global growth and euro zone sovereign debt concerns, albeit by not as much as the French and German blue-chip indexes.

Dmytro Bondar, technical analyst at Royal Bank of Scotland, said the fact the index had failed to break above 5,202 points could suggest a deeper correction is due, while momentum oscillators showed mixed signals.

The 14-day Relative Strength Index was showing bullish divergence, while the slow stochastic had formed a bearish signal known as a "negative crossover".

Looking ahead, he said there was good support at 5,034 points, but a close below could indicate a "high chance of another fall before recovery".

Not every stock enjoyed the bounce, however, particularly among the heavily sold off banking sector, which slid further as short-sellers continued to eye it in the face of a ban in other parts of Europe.

Standard Chartered, Barclays, Lloyds Banking Group were among the biggest weighted fallers, while Royal Bank of Scotland fell 5.3 per cent in heavy volume, at 162 per cent of its 90-day daily average.

"If you can't short French banks, Italian banks, Spanish banks, you have to short something that's as close to, and that's why they're shorting UK banks," Monument Securities' Ash said.

European shares bounced yesterday after a steep sell-off last week, with Italy's ENI among the main gainers on hopes that a new political regime in Libya will help it restore oil production activities to former levels.

The FTSEurofirst 300 index of top European shares rose 0.8 per cent to close at 916.78 points, having risen as high as 933.35, after falling six per cent last week.