US
UK
Spanish
Chinese
Japanese
Hong Kong
Canada
Australia
Korean
Deutsch
India
Sponsorship Link
Britain's top share index rose slightly on Tuesday as investors took ratings agency Moody's threat to downgrade Britain in their stride, with cheap valuations and central bank support holding up assets like the banks.
UK bank stocks pared early losses in tandem with the broader UK benchmark index, which recovered 5.25 points, or 0.1 percent, to stand at 5,910.95 by 1128 GMT, bouncing off an intraday low of 5,882.03.
Those gains coincided with a bullish start for U.S. futures, which suggested Wall Street would rise when it opened later on Tuesday. U.S. January retail sales numbers and import and export prices are due for release at 1330 GMT, and December U.S. business inventories are due at 1500 GMT.
The main focus in the UK was Moody's warning it may cut the triple-A ratings of France, Britain and Austria. It downgraded six other European nations including Italy, Spain and Portugal, citing growing risks from Europe's debt crisis.
Must Read
"Investors are getting used to living with downgrades now, and the latest decision by Moody's won't change their views of the UK," said David Miller, Partner at Cheviot which has around 3.5 billion pounds of assets under management.
Follow us
However volumes on the index were weak -- just 28 percent of their 90-day average around midday -- suggesting cautious market participants were keeping to the sidelines. Investors rotated heavily into last year's losers, banks and miners, in January.
Philip Poole, global head of macro investment strategy at HSBC Global Asset Management, said he expected the reallocation into riskier assets to continue and pointed to the buoyancy of assets closely associated with sovereign ratings as a reflection that downgrades have been largely priced in by the market.
"Ratings agencies in their actions tend to be backward looking and markets tend to be forward looking, which means things get priced in much more quickly," he said.
Highlighting that fact, on Tuesday UK gilt yields barely moved, while Italy's three-year borrowing costs dived compared to a month ago at its latest auction as ECB loans continue to support demand for government paper.
UK banks, which have large exposure to sovereign debt, bounced off the day's lows, showing the sector has investor support at the current levels, where it trades on a 12-month forward price to earnings of 9.7 times, compared to the FTSE 100 on about 10.4 times, according to Thomson Reuters data.
BARCLAYS BOUNCE
Barlays rose 0.6 percent as two brokers raised their recommendation on the UK bank following recent results.
Exane BNP Paribas upgraded the UK lender to "outperform" from "neutral" saying: "With Barclays Capital starting the year strongly, management targeting 2 billion pounds of non-performance cost savings and no evidence of deteriorating credit quality, we believe the downgrade cycle to be over."
Shore Capital agreed and upgraded its rating on Barclays to "neutral" from "sell" and said that despite the recent rally of about 60 percent since mid-November, the valuation -- on 0.6 times Dec. 2011 tangible net asset value, and with a forecast 2012 return on total equity of 8.4 percent -- did not appear stretched.
