Stimulus plans lift UK FTSE into Greek vote

By Francesco Canepa | June 15, 2012 9:51 PM IST

The top share index closed a touch higher on Friday as expectations of global monetary stimulus mitigated tensions surrounding Greece's elections, which were set to decide of the country's euro zone survival and steer financial markets.

G20 officials said top central banks are ready to step in if needed to stabilise financial markets after Sunday's Greek election, where pro- and anti-bailout parties were seen neck and neck, while the Bank of England announced a programme of cheap loans to banks.

The prospect of concerted monetary action to support the global economy boosted cyclicals stocks, with industrial metals and transportation shares leading the charge as they rose 8 percent and 5 percent, respectively. <.FTNMX1750> <.FTNMX2770>.

"The potential for further quantitative easing was always going to give stocks a bit of a lift but people are still naturally cautious and certainly this week haven't increased their exposure to equities," Oliver Stansfield, director of equity sales at Fox-Davies Capital.

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"They know that if the news (from Athens) comes back negative the commodity and higher risk stocks are going to get hit."

European equity funds recorded net outflows for the tenth time in the past 12 weeks in the seven days ending on June 13, as investors put their cash in tangible assets perceived as safer, such as gold, according to EPFR data.

Shares in UK banks rose 1.5 percent after the Bank said it would pump more than 100 billion pounds into the banking system in a bid to stimulate credit and revive a weakening UK economy <.FTNMX8350>.

"From the banking point of view and for stimulating the economy it's probably not a bad thing because it is giving you a little bit of comfort and it's acting relatively positively," Paul Mumford, portfolio manager at Cavendish Asset Management, said.

"From an investor perception, it does de-risk the situation to a certain extent because they know that there are funds in the background."

The FTSE 100 index <.FTSE> ended 11.76 points higher, or 0.2 percent, at 5,478.81 points, off an intra day high peak of 5,522.87, having traded more than twice its 90-day volume average thanks to activity related to futures and options expiries.

EXPOSED TO REVERSAL

While the immediate technical trend on the FTSE was still up, momentum was weak, leaving the index exposed to a reversal if the Greek election provided investors with new reasons for worry.

"From a chartist point of view, the validation of bullish trading pattern known as a 'double bottom' calls for a further recovery on a very short term basis," Nicolas Suiffet, a technical analyst at Trading Central, said.

"The immediate trend is up but the momentum is weak. The upward potential is likely to be limited by the key 50 percent Fibonacci retracement level of the March to June down move around 5,611."

Analysts at brokerage Charles Stanley estimated an election results perceived as positive by the market could send the FTSE to 5,600 points in the short term, while a negative outcome could drag the index to its recent bottom of 5,250 and, possibly, back down to last autumn's levels of around 4,900.

Bookmakers see Greece's conservative New Democracy, which backs a 130 billion euro (102 billion pounds) bailout keeping Greece afloat, beating leftist SYRIZA, which wants to scrap the bailout, end privatisations and nationalise banks.

From a longer-term perspective, a euro zone break up and the ensuing economic weakness could push the FTSE as low as 3,500, according to UBS's strategists, who kept their base case, year-end target unchanged at 5,800.

They estimated earnings for UK blue chips would fall 20 percent in 2013 if the euro zone breaks apart and macroeconomic uncertainty would leave the FTSE trading at a price-to-earnings multiple of 8.5 times, compared to 10.5x in UBS's base scenario.

The FTSE was trading at 9 times its earnings for the next twelve months on Friday, an already distressed valuation when compared to the index's 24-year average multiple of 13.18, Datastream data showed.

Aggreko was the top blue chip faller, down 4.4 percent as the world's biggest temporary power provider's warned of a slower second-quarter growth.

The report provided further evidence earnings momentum on the FTSE was deteriorating as growth prospects for Europe, the United States and China dimmed.

There were around 6 percent more estimate downgrades than upgrades on UK blue chips in the last month, extending a negative trend that started in late April, according to I/B/E/S data elaborated by Datastream.

(Additional reporting by Jon Hopkins; Data by Scott Barber and Vincent Flasseur; editing by Ron Askew)

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