The FTSE 100 paused after recent sharp gains on Thursday, as M&A activity among miners prompted investors to divert funds away from other sectors such as oils and pharmaceuticals, while mixed corporate earnings also weighed on the index.
UK-listed miners <.FTNMX1770> were broadly firmer after Xstrata
A combination of the two companies is likely to provide a boost to the mining sector overall and a bullish signal to the market, Oriel Securities said in a note.
Xstrata gained 11.1 percent and Glencore rose 6.5 percent, the top two blue chip risers, in heavy trade with volumes at 325 percent and 177 percent of their respective 90-day averages.
Traders said under UK rules on takeovers and mergers, Glencore is required to announce its intentions by no later than 1700 GMT on March 1, but asked if Xstrata would agree to the nil-premium deal Glencore was thought to be seeking.
A London-based trader said: We think that is bad news for Xstrata shareholders who should be demanding a premium. Also there is a negative readacross to Kazakhmys
ENRC and Kazakhmys shed 0.3 percent and 1.1 percent, respectively.
Jonathan Jackson, head of equities at Killik & Co, said the near-term prospect of consolidation in the mining sector may act as a drain on oils and pharmaceuticals, as investors seek to increase their allocations to mining.
Integrated oils <.FTNMX0530> were one of those sectors to suffer, with falls led by Royal Dutch Shell
London's blue chip index <.FTSE> was down 8.40 points or 0.2 percent at 5,782.32 by 1156 GMT, having risen 2 percent since Tuesday and around 4 percent in the year to date, in a rally led by banking and mining shares.
The index has struggled to break through and close convincingly above the 5,800 resistance level, and analysts cautioned that recent gains have been constructed on far from solid ground.
UBS warned the new year rally had been built on low volumes, led by hedge funds, leaving long-only buyers on the sidelines, and with hedge funds' gross leverage close to highs at the height of the credit crunch following the Lehman collapse.
JPMorgan said the risk-on 'trash rally' experienced (since early January) seems to have taken everyone by surprise.
It added: We strongly believe that we are going to experience a repeat of 2011 and that 'value' will end the year strongly below current levels. We advise clients to position their portfolios accordingly.
Credit Suisse said it is retaining its small underweight position in cyclicals as it believed there had already been a peak in recent U.S. macro-economy momentum which had helped boost appetite for riskier assets.
Elsewhere a rally in banks <.FTNMX8350> stalled as Germany's Deutsche Bank
Royal Bank of Scotland
In other earnings news, AstraZeneca
Anglo-Dutch consumer products group Unilever
Artificial knee and hip maker Smith & Nephew
Across the Atlantic, Wall Street futures pointed to a flat open ahead of the January U.S. Challenger layoffs report, due at 1230 GMT, and the latest weekly U.S. initial jobless claims numbers, due at 1330 GMT, which will both be studied for clues as to Friday's key January U.S. non-farm payrolls.
Aside from that, fourth-quarter U.S. productivity numbers will also be unveiled at 1330 GMT.
(Editing by David Holmes)