UK shares lag peers as oil shares weigh

LONDON Mon Jan 13, 2014 7:11am EST

LONDON, Jan 13 (Reuters)- Britain's FTSE 100 traded slightly lower on Monday, lagging its continental peers as falls in heavyweight oil stocks more than offset a rally in banks.

The latter were boosted by the prospect of lighter leverage rules.

Energy shares tracked crude prices lower as an international deal on Iran's nuclear programme was seen as potentially paving the way for a lifting of sanctions on the country, bringing Iranian oil back onto the global market.

Oil major BP was down 0.9 percent, also hit buy a target price cut from analysts at Barclays.

The energy sector, the largest on the FTSE, knocked 7.1 points off the index, which was down 3.78 points, or 0.1 percent at 6,736.16 points 1155 GMT.

Defensive food & beverage, pharmaceutical and utilities shares also weighed on the market as investors switched into sectors that offer greater exposure to a nascent European economic recovery, such as banks and auto parts.

The FTSE has risen roughly 3.5 percent in the past six months, compared with an 11 percent increase for the pan-European FTSEurofirst 300, due to the British index's higher weightings in defensive sectors and in shares that depend on commodity prices, which have mostly flatlined or fallen in recent months.

"We see more opportunities in continental Europe, Nick Nelson, a strategist at UBS, said. "We've still got a (FTSE) target of 7,400 for the year but we just think you're going to see better performance when you look across the wider European area."

Banks helped keep the FTSE afloat after regulators agreed on Sunday that they would be able to include derivatives on a net rather than the much bigger gross basis when calculating leverage ratios under Basel III.

The easing is aimed at keeping the global economy financed as it means banks will not have an incentive to ditch some types of assets, such as loans to companies, in order to meet the leverage targets.

"It's all about the banks. The relaxing of the regulations is really improving investor sentiment in the sector," said Jonathan Roy, a broker at London Stone Securities.

Barclays rose 2.6 percent, Royal Bank of Scotland was up 2.5 percent and Lloyds up 1.1 percent.

"This change in guidance around the leverage ratio calculation is likely to be most beneficial for investment banks, in our view, and hence of the quoted UK banks we would expect Barclays' shares to react most positively to this news," Gary Greenwood, analyst at Shore Capital, said in a note.

WM Morrison rose 4.9 percent to the top of the FTSE after media reports that, following weaker than expected Christmas sales, the grocer was under pressure from investors to sell part of its property portfolio, freeing up cash to return to shareholders.

"(Property sales worth) 800 million pounds to 1 billion pounds ($1.65 billion) could be a sensible amount," Graham Jones, an analyst at Panmure Gordon & Co, said.

"Then they could do a (share) buyback to offset the earnings dilution from a higher rental cost together with a special dividend."

Jones, however, cautioned the sale of some of Morrison's property assets was "no magic wand" and the group's prospects were still hampered by a poor competitive position.

Volume on Morrison's stock was nearly three times its full-day average for the past three months, compared to around 40 percent of the average for the FTSE.

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