The FTSE 100 crept into positive territory on Tuesday, with miners tracking metal prices higher as the anticipation of cheap European Central Bank loans flooding the financial system boosted the outlook for raw materials demand and for lending.
The blue-chip index <.FTSE> closed up 12.36 points, or 0.2 percent, at 5,927.91, as gains were capped after weak economic data from the U.S. showed the world's biggest economy began 2012 on a slightly weaker note.
Miners rose as copper prices rallied to a more than two-week high, lifted by the expectations of large-scale cheap funding for banks from the European Central Bank.
Although Paul Kavanagh, a partner at Killik & Co, sees the second ECB long-term refinancing operation (LTRO) on Wednesday as potentially offering immediate support to equity markets, he thinks the key to long-term gains lies elsewhere.
The trick is we want to see some decent numbers coming out on the economy, and that's the story that will unravel over months rather than weeks, he said.
Banks were higher, although there was a note of caution after the downgrade of Greece to selective default by credit rating agency Standard & Poor's.
FTSE 100 volume was thin at just 85 percent of the 90-day average, meaning fund managers remained cautious about global economic conditions and were unwilling to commit fresh money to a market that has rallied some 15 percent from November lows.
Yet volatility <.VFTSE> has fallen around 20 percent this year, suggesting those that are investing have become more satisfied with the equity valuation gap perceived to have existed before the rally over the last three months.
For those wanting to get involved in the market now, Deutsche Bank analysts said the way to play the recent gains would be to buy put options on high beta cyclical sectors such as mining, and replace stock with call options on defensive, ultra-low volatility equities.
As Europe battles the threat of recession, the United States tries to decouple itself from the impact of the euro zone debt crisis and China battles to sate investors' appetite for growth, corporate earnings remain challenged.
Of the 62 percent of companies in Europe to report earnings so far this quarter, 50 percent have beat or met expectations with a positive reported surprise of 1.4 percent, according to Thomson Reuters Starmine data.
You have to say that one of the surprising features through the whole of this crisis is how good corporate earnings continue to prove, Killik's Kavanagh said.
Car and plane parts maker GKN
GKN's shares, however, fell 4.4 percent having enjoyed a near 40 percent rise since mid-December.
House builder Persimmon
Other house builders were also in demand led by Taylor Wimpey
Others did not fare so well. Whitbread
And AZ Electronic Materials
Integrated oils waned too, as oil prices slid towards $123 a barrel on Tuesday, having jumped to near 10-month highs last week on tensions over Iran.
(Editing by David Hulmes)