UPDATE 1-Vodafone helps UK's FTSE post a second day of gains

Thu Feb 6, 2014 11:54am EST

* FTSE 100 up 1.6 pct, rising for second consecutive day

* Vodafone adds most points to FTSE, AstraZeneca biggest drag

* FTSE still down around 3 percent in 2014

By Tricia Wright

LONDON, Feb 6 (Reuters) - Britain's top equity index rose for a second straight day on Thursday, led by strong gains from heavyweight telecoms group which helped the market recover its poise after a recent five-day losing streak.

The blue-chip FTSE 100 index, which had fallen for five straight days during the past two weeks, closed up 100.39 points, or 1.6 percent, at 6,558.28 points.

Investors had been unnerved by signs of slower Chinese growth and the withdrawal of U.S. monetary stimulus, concerns that spread from emerging markets to the world's big stock markets.

A 3.7 percent rise in Vodafone, after the mobile operator expressed confidence that its revenues would improve, contributed the most points to the FTSE 100 index on Thursday.

Toby Campbell-Gray, head of trading at Tavira Securities, said Vodafone kept attracting investors because of its solid dividend yield and because of speculation about a takeover, even though AT&T ruled out a bid for Vodafone last month.

"Vodafone's a quality stock. Why wouldn't you buy them?" said Campbell-Gray.

A bounce back in emerging market currencies proved supportive to the likes of consumer goods maker Unilever and brewer SABMiller, which have big EM exposure. For a list of European blue-chips with the most exposure to emerging markets:

And, with much of the market focus on Friday's U.S. non-farm payrolls report, investors took heart from a better-than-expected report on U.S. weekly initial jobless claims.

"This bounce could be due to speculators abandoning their bearish positions ahead of the NFP tomorrow. All eyes will be on the 200-day moving average again (currently at 6,563). If the index closes above it... tomorrow then we could well see some healthy gains next week," Gain Capital technical analyst Fawad Razaqzada said.

One cause for concern is that the earnings picture overall remains mixed, underscored by a warning from AstraZeneca that it has another difficult year ahead in the face of generic competition for its popular heartburn and ulcer drug Nexium.

Its shares dropped 1.6 percent, the biggest drag on the UK benchmark. The loss trimmed the drugmaker's advance this year to around 7 percent, as analysts flagged a likely downgrade to the consensus forecast for its 2014 earnings.

"Our initial conclusion is that guidance will disappoint and consensus EPS forecasts will fall by at least several percent, while recognizing that the shares' recent performance owes little to near-term fundamentals and much to long-term pipeline hopes," Deutsche Bank said in a note.

Cautious results statements are sounding alarm bells for investors who had been betting on a recovery in European earnings as the main driver for an equity market rally in 2014.

With the market already trading at lofty valuations after a bumper 2013, bolstered by central bank stimulus, analysts say that valuations have little scope to make further gains, which means earnings must increase before prices can.

The FTSE 100 trades on a 12.9 12-month-forward price/earnings ratio, against its 10-year average of 11.9, Thomson Reuters Datastream shows.

A lacklustre start to the earnings season has contributed to a drop of around 3 percent on the FTSE 100 in 2014.

Of the 26 percent of European companies to have reported so far, 39 percent have missed profits expectations and 44 percent have missed expectations on revenue, Thomson Reuters Starmine data shows.

But investors with a view over all of 2014 remain bullish, expecting a pick-up in earnings in the next quarterly reporting season.

"The fact that clients are still happy to position themselves long and not to take aggressive shorts on the index against their long equity positions probably suggests that they're confident that there will be a turnaround," said Matt Basi, head of sales trading at CMC Markets.

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