FTSE treads water but miners drop after ominous statistics from China

BRITAIN’S top share index pared early losses to end flat yesterday, with uncertainty regarding the outcome of a German court ruling on the Eurozone’s bailout fund and the US Federal Reserve’s likely stimulus plans prompting investors to avoid strong bets.
However, analysts said sentiment was improving following some positive steps taken by policymakers in Europe and the FTSE 100 could rise between four and five per cent by the end of 2012.

Investors awaited today’s German court ruling, which will probably reject the temporary injunction request against the European Stability Mechanism (ESM) and Europe’s budget discipline pact, legal experts predicted in a Reuters poll, but they expected the court to impose tough conditions.

“Certainly there is going to be some conditionality attached to the ruling, but the market would be very happy to see it ratified. A positive outcome is partly priced in, but there is scope for the FTSE to gain further,” said Angus Campbell, head of sales at Capital Spreads.

“There seems to be a bias towards riskier stocks. If we see more stimulus in the United States than the market is expecting, then we could see a further appetite for risk.”

The Fed will hold a two-day policy meeting, starting tomorrow. Economists in a recent Reuters survey predicted a 60 per cent chance of another round of stimulus known as quantitative easing.

Miners suffered heavily yesterday on concerns about metals demand in China, the world’s top consumer. The UK mining index fell 0.8 per cent, Anglo American dropped 2.3 per cent and Xstrata fell 1.5 per cent.

Vedanta Resources lost 2.4 per cent after Goa, a key iron ore producing state in India, temporarily suspended all mining activities. Shares in Sesa Goa Ltd, an Indian unit of Vedanta that gets most of its iron ore from mines based in Goa, fell more than six per cent.

The FTSE 100 index ended 1.01 points, or 0.02 per cent, lower at 5,792.19 points after falling to a low of 5,764.22 earlier in the session. The index surged 2.1 per cent last Thursday and rose 0.3 per cent on Friday on the back of the European Central Bank’s bond buying plans. It is up four per cent so far this year.

“We have got some more upside, but think that investors are cautiously positioned at the moment. The best way to play is to focus on sectors such as banks and utilities,” said Robert Parkes, equity strategist at HSBC Securities.

“The global economy is still growing, corporate balance sheets are strong and we don’t see a collapse in earnings from here. That puts the spotlight on valuations, which we feel are too low and pricing in too much negative news.”

According to Thomson Reuters Datastream, the FTSE 100 index trades on 10.3 times its 12-month forward earnings, against a 10-year average of 12.8. The US S&P 500 index trades on 12.6 times its one-year forward earnings.

Among individual movers, Burberry plunged nearly 21 per cent after the British luxury brand warned that its full-year profit would be at the lower end of market forecasts, noting store sales slowed in recent weeks.

Campbell of Capital Spreads and Parkes of HSBC see the FTSE index closing at 6,000 and 6,050 points respectively by the end of 2012, a rise of between four and five per cent from yesterday’s close.