UPDATE 1-UK's FTSE 100 powers to 1-week high as banks gain

Tue Jan 7, 2014 11:57am EST

* FTSE 100 edges up by 0.4 pct as charts hint at more gains

* Lloyds leads rally in financials

* Analyst comments hit Severn Trent, Morrison

By Toni Vorobyova

LONDON, Jan 7 (Reuters) - Britain's blue chip share index rose to a one-week high on Tuesday, with gains in financial stocks pushing the FTSE 100 towards major technical resistance levels.

Lloyds rallied 3.0 percent, as investors bought the stock on expectations that the bank will start paying dividends this year and that it will benefit from a recovering British economy and housing market.

Lloyds is expected to announce a payout to shareholders on its 2013 results, with StarMine consensus pointing to a dividend yield of 0.4 percent this year, rising to 3.1 percent next year.

"Lloyds is a domestic story. If the property market is going to do well, then the leverage you get out of Lloyds is great, plus they are going to pay a dividend this year, so the income funds will be buying them," said Zeg Choudhry, head of equities trading at Northland Capital.

Bolstering the British economic recovery story, car sales rose to their highest level since 2007 last year, data showed on Tuesday, while British businesses reported strong growth and rising confidence.

Analysts at Bernstein Research highlighted Lloyds as being the mostly likely to directly benefit from a consumer recovery, while noting that RBS looks promising on valuation and that HSBC is likely to increase its risk appetite in Britain.

RBS shares rose 1.8 percent, while HSBC - the biggest constituent in the FTSE 100 - added 2.4 percent. Together financials contributed 23.4 points to the FTSE 100.

The index closed up 24.72 points, or 0.4 percent, at 6,755.45 points, approaching its Dec. 30 high of 6,768.44 points in what technical analysts said was generally an upbeat picture.

CYCLICAL STOCKS

Also among the top gainers, IAG rose 3.4 percent in a late-session rally after posting a 3.6 percent surge in December traffic, helped by a strong performance at British Airways.

Other sectors exposed to the economic cycle such as consumer cyclicals and energy also held up well as investors made fresh bets for 2014.

"If you believe that there is some cyclical upturn - and there does seem to be signs of that - then ... I think the danger is that you remain too defensive. You've got to start to think a bit more cyclical," said Paul Sedgwick, head of investment at Frank Investments.

"I personally have been playing the cyclical recovery with industrial names, or more cyclically exposed engineering companies, chemical companies."

Some of the more defensive stocks in utilities and food retailers lagged the broader market on Tuesday, hit by cautious comments from analysts.

Water company Severn Trent dropped 2.2 percent after JP Morgan downgraded the stock to underweight, while supermarket chain Morrison fell 1.1 percent after Barclays said there was a risk it may step back from a pledge to deliver positive like-for-like sales growth in the fourth quarter.