Nervous FTSE ends higher as EU solution for Greece looms

FINANCIALS drove gains on Britain’s top share index yesterday, as hopes a solution could be found to Europe’s sovereign debt crisis boosted investor sentiment.

The UK’s benchmark index closed up 46.07 points or 0.8 per cent at 5,899.89, having endured a choppy session, trading in a 137 point range as nervous investors jostled positions awaiting an announcement from key debt talks in Brussels.

The bulls won the day as European Union officials seemed close to a deal to bail out debt-stricken Greece with the help of the private sector and with no new tax on banks.

Sources said the European Central Bank was willing to let Greece slip into temporary default as part of a crisis response.

“Potentially it's good news, but I think there are too many economic headwinds to make a definitive call that the worst is now behind us,” Peter Dixon, an economist at Commerzbank, said. “We’ve got to look at today’s rally as simply a correction to some of the perhaps overly pessimistic sentiment that’s crept in over the past week.”

Banks and insurers, most exposed to European sovereign debt, rallied hard with Barclays the top riser, up 7.8 per cent.

UK-listed banks enjoyed their biggest one-day percentage gain since the start of 2011, but remain down over eight per cent in 2011.

Although the rally looked like an exaggerated knee-jerk reaction, valuations show shares in the FTSE are ripe for the picking, should uncertainty be removed over the European and US debt situations.

Beaten-down retailers such as Kingfisher, up 5.6 per cent, enjoyed a strong rally after the group’s update.

Drugmakers also added strength to blue chips, led by AstraZeneca, up two per cent after falling in the previous session after its heart drug Brilinta gained approval from US regulators, opening up the massive US market to the company’s biggest drug hope.

Relief that Europe was making progress on dealing with its debt problems, and hopes that it would avoid widespread contagion and plunge the region into a deep recession, was not enough to reverse losses in the mining sector.

The sector underperformed, suffering in tandem with easier copper prices after poor manufacturing data from top metals consumer China heightened worries over the growth outlook for the country.

Factory output in the world’s largest consumer of commodities shrank in July for the first time in 12 months.

“We still forecast strong global GDP growth, at three per cent to four per cent in both 2011 and 2012. But we are again making more GDP forecast downgrades than upgrades,” Willem Buiter, analyst at Citigroup, said.

On the downside, outsourcing group Capita shed 1.6 per cent as a bigger than expected seven per cent fall in organic revenue weighed on first-half results. Analysts at Evolution Securities downgraded their rating to “neutral”.

Peer Serco Group dropped 1.1 per cent.

Chip designer ARM Holdings fell 1.6 per cent as Nomura downgraded its rating on US peer Intel to “reduce”, a day after the top chipmaker cut its outlook for 2011 personal computer unit sales and elevated its capital expenditure.