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FTSE lower ahead of German Court

Tuesday, September 11 09:47:45

Britain's blue chip share index fell back today, halting a good run over the past week on the back of worries about how a German constitutional court decision will affect efforts to calm the euro zone crisis. There is also concern whether the U.S. Federal Reserve will make good on expectations of another round of stimulus for the economy, prompting investors to favour stocks seen as defensive options for when the economy worsens. The German Court is expected to approve the euro zone's new bailout fund but could attach conditions that would limit Berlin's flexibility on future rescues or policymakers' plans to for action in the near-term. The mining sector had led a rally after the European Central Bank laid out plans to buy government bonds last week, and they headed the casualty list on Tuesday as copper prices eased back from 4-month highs.

Among the weak miners, Vedanta Resources was a big faller, down 4.3 percent after Goa, a key iron ore producing state in India, temporarily suspended all mining activities. Shares in Sesa Goa Ltd, an Indian unit of Vedanta which gets most of its iron ore from mines based in Goa fell more than 7 percent. "The pendulum has swung away again from the miners and back towards defensive issues, such as tobacco and drug stocks as investors position for the key German court ruling, as well as the Federal Reserve meeting which ends on Thursday," said Andrew Crook, a trader with Sucden Financial Private Clients. "No-one wants to be caught out, even though positive decisions are expected so some profit-taking was inevitable."

After big falls in the previous session, defensively-perceived stocks bounced back on Tuesday led by British American Tobacco, up 1.1 percent, and GlaxoSmithKline, ahead 1.0 percent. That strength helped limit the blue chip index's falls overall. At 0710 GMT, the FTSE 100 index was down 16.40 points, or 0.3 percent at 5,776.80, having ended just 0.03 percent lower on Monday after yo-yoing in a tight range around the psychologically important 5,800 level.

Burberry was easily the biggest individual blue chip faller, plunging 18 percent after the British luxury brand warned that its full-year profit would be at the lower end of market forecasts after store sales slowed in recent weeks. Both Nomura and Seymour Pierce swiftly downgraded their ratings for Burberry. "The slowdown has been broad based with no particular area worse than others and comparable sales have gone negative," Seymour Pierce said in a note cutting its rating for Burberry to "hold" from "buy".

Some commentators expected Burberry shares to rally after such sharp falls, but also highlighted technical levels.

"With a reaction of such magnitude in a FTSE100 stock, we would not be surprised to see bargain hunters emerge around these levels after the dust has settled," said Mike van Dulken, Head of Research at Accendo Markets. ( C) Reuters