Banks limit FTSE recovery after Portugal downgrade

Wed Mar 16, 2011 5:25am EDT

* FTSE up 0.1 pct, investor panic eases over Japan

* Banks fall, impacted by Portugal downgrade, HSBC ex-div

* Commodities rally, seen as benefitting from Japan rebuild

By David Brett

LONDON, March 15 (Reuters) - Weakness in banks after Portugal's credit rating was cut hampered a recovery on Britain's top share index on Tuesday, offsetting commodity stock gains as the previous session's Japan-related sell-off subsided.

Banks .FTNMX8350 took 12 points off the index after Moody's overnight cut Portugal's sovereign debt rating by two notches and said further downgrades are possible. [ID:nL3E7EF431]

"Recent focus has been on the Middle East and Japan. The downgrade reminds us the Europe's debt problems linger," Jimmy Yates, head of equities at CMC Markets, said.

HSBC (HSBA.L), down 2.5 percent, heaped pressure on the sector after going ex-dividend, while insurer Standard Life (SL.L) and UK REIT Land Securities (LAND.L) also fell after losing their dividend attractions.

The FTSE 100 .FTSE was up 5.16 points at 5,700.44, having ended down for a fifth consecutive session on Tuesday when panicky investors wiped nearly 21 billion pounds ($33.86 billion) off the market in response to the economic threat posed by the aftermath of Japan's devastating earthquake and tsunami.

Hakan Friesen, head of economic research at SEB, says there will be short-term effects on financial markets and economy from Japan, and that nuclear problems pose a big risk.

Friersen sees further downside potential on equities in Japan of 10 percent, and in the United States and Europe of 5 percent, but back to pre-crisis levels in 3 to 6 months.

He expected: "upward pressure on oil prices in a medium time perspective" and "bond yields further down in the short run, but return to pre crisis level in line with equities."

TECHNICAL WORRIES

Technical analysts also warned of near-term risks to the FTSE.

"Given the near-term range of 5,859.00 to 5,591.59, aggressive counter-trend traders should watch for a possible short-covering rally to 5,718.44 to 5,748.38. Bearish traders may re-emerge in this zone to pressure the market lower," James A. Hyerczyk, analyst at Autochartist, said.

InterContinental Hotels (IHG.L) fell 1.6 percent after the company announced a change in ceif executive.

With the FTSE off around 5 percent in March alone, led chiefly by falls in commodity assets, investors took the opportunity to hunt for bargains.

"The sell-off is presenting some solid buying opportunities for the longer term investor, although with repeated bouts of panic selling also hitting the market, the outlook remains choppy," a trader said.

Mining .FTNMX1770 and energy .FTNMX0530 stocks rose in tandem with commodities as traders said they expected strong demand for base metals and oil once the full impact of the earthquake in Japan is known.

Elsewhere Associated British Foods (ABF.L) added 3.7 percent, after Credit Suisse lifted its rating on the food and retailing group to "outperform" from "neutral", citing the benefits of high sugar prices.

Investors will watch UK employment data at 0930 GMT for more evidence on how the domestic economy is faring. (Editing by Hans Peters)

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