FTSE lags over China’s rate hike and European debt fears

BRITAIN’S top share index edged lower yesterday as miners fell on concerns that an interest rate hike in China could hurt demand for metals and banks dropped on worries over European debt.

The FTSE 100 closed down 9.92 points, or 0.2 per cent, at 6,007.06, having rallied 7.4 per cent off lows hit in March following the earthquake in Japan.

Miners were among the biggest laggards after China’s central bank increased interest rates for the fourth time since October.

Banks fell after credit ratings agency Moody’s cut Portugal’s sovereign debt by one notch, saying it believed an incoming government would need to seek financing support from the European Union as a matter of urgency.

Barclays and Lloyds Banking Group shed 0.5 per cent and 1.2 per cent, respectively.

Concerns were mounting as to how cyclical assets were going to fare against the backdrop of global monetary tightening.

“Interest rates are rising in the developing world, we are going to get an ECB (rate) increase this week, and maybe in June we’re going to see the Fed bringing its QE (quantitative easing) to an end – all of this suggests that the tide is turning a bit,” Mike Lenhoff, chief strategist at Brewin Dolphin, said.

“We could be entering a phase where maybe the defensive (stocks) begin to show a bit of leadership.”

Observers also said an elevated oil price created conditions for weakness in equities, with Brent crude topping $122 a barrel yesterday on unrest in oil exporting countries in the Middle East and Africa.

“At some point these prices are going to be impacting costs and margins, and obviously if you’re increasing costs, you’re going to have to increase prices, and if you can’t... then you’re going to shrink your margins,” Michael Hewson, analyst at CMC Markets, said.

“While (the FTSE 100) is below 6,050 (its highs in March), I think we’ll come lower, and we’ll test the 5,900 levels that we saw at the end of last week.’

Among individual stocks, heavyweight Vodafone dropped 1.5 per cent, with traders citing a downgrade to “reduce” by Evolution Securities.

The share price falls also came as Nomura cut its estimates on the mobile communication firm, citing impending changes to Indian telecom policy and a tough Spanish outlook.

Vedanta Resources grabbed the top spot on the blue-chip leader board, up 4.4 per cent, after its chairman said he believed the Indian government would approve its plan to buy Cairn Energy’s India assets in the next few days.

Meanwhile, TUI Travel rose 2.4 per cent on news its German parent TUI AG has found an alternate route to exit its container shipping business Hapag-Lloyd after putting on ice plans for a flotation.

Insurance consolidator Resolution climbed 3.2 per cent, boosted as Citigroup raised its target price.

Meanwhile European shares edged up to their highest close in nearly four weeks yesterday, with energy firms gaining after further unrest in the Middle East pushed crude prices to a two-and-a-half year high.

The FTSEurofirst 300 index of top European shares rose 0.2 per cent to 1,143.94 points, the highest close since 9 March. Volumes were 94 percent of the index’s 90-day average. Brent crude topped $122, and hit its highest in two and a half years,