Commodities rally inspires fragile FTSE recovery

LONDON Tue May 24, 2011 7:46am EDT

LONDON (Reuters) - Britain's top shares advanced on Tuesday, as a bounceback in commodity stocks helped the index claw back some of the previous session's sharp falls.

By 1118 GMT, the FTSE 100 .FTSE was up 21.87 points, or 0.4 percent, at 5,857.76, having shed 1.9 percent on Monday to its lowest close since March 23 on growing fears over further sovereign debt crises.

These were sparked by a downgrade of Greece's debt, a ratings outlook warning on Italy and doubts about austerity measures in Spain. These factors left traders skeptical that the index's upward momentum could be sustained.

"I think there's an awful lot of nervousness out there, a lot of unknowns on the road ahead, and it's going to be pretty rocky," Martin Dobson, head of trading at Westhouse Securities, said.

"The risk of contagion in Europe is extremely high and markets will be vulnerable short term ... My gut feeling is the index will fall another 2 or 3 percent from this level."

Miners .FTNMX1770 helped nudge the index into positive territory, rallying in tandem with metals prices after falls on Monday, with copper regaining 1.4 percent after a 3 percent decline in the previous session.

Glencore (GLEN.L) added 2.3 percent but remained below its issue price as unconditional trading began in the commodity trader's stock.

ENERGY BOOST

Integrated oil stocks recovered their poise as crude firmed, led by a 3.1 percent gain in BG Group (BG.L). The company was helped by a target price increase from Goldman Sachs as part of a sector review.

Cairn Energy (CNE.L) topped the FTSE 100 leaderboard, up 4.3 percent in heavy trading, after the oil explorer announced a drilling campaign in offshore Greenland.

Banks were out of favor after credit rating agency Moody's said it might cut its rating on 14 British financial groups, including Lloyds Banking Group (LLOY.L) and Royal Bank of Scotland (RBS.L), off 1.2 percent and 0.4 percent respectively.

"While there is certainly a fair amount of credibility to Moody's actions, we also note the capital position of the UK banks is among the best in Europe," Espirito Santo Investment Bank said in a note.

Elsewhere, Marks & Spencer (MKS.L) was the biggest blue-chip faller, down 1.4 percent, after the food and clothing retailer met forecasts with a 13 percent rise in annual profit, but said it remained cautious on the outlook for consumer spending.

Primark owner Associated British Foods (ABF.L) slid 0.8 percent, and supermarket chain Tesco (TSCO.L) fell 0.7 percent.

Travel stocks were on the descent as flights to northern Britain were canceled on Tuesday over worries about a volcanic ash cloud from Iceland.

British Airways owner International Airlines Group (ICAG.L) shed 2.1 percent and tour operator TUI Travel (TT.L) slipped 1 percent.

"The issues are still out there with regards to euro zone sovereign debt problems, the Icelandic ashcloud, and Moody's potentially coming back and still downgrading banks," Manoj Ladwa, senior trader at ETX Capital, said.

"Nothing's really gone away. The market's staging a small bounce after yesterday's declines."

(Additional reporting by Jon Hopkins; editing by David Hulmes)

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