UK mining shares post biggest drop for 6 months on China worries

Tue Feb 25, 2014 7:26am EST

Related Topics

* FTSE 100 down 0.9 pct, miners slip 2.4 pct

* GKN falls, traders cite GKN warning on currency movements

* FTSE currently in technically "overbought" territory

By Atul Prakash

LONDON, Feb 25 (Reuters) - Mining shares extended losses to post their biggest one-day slide in six months on Tuesday as concern persisted that slower economic growth in China and lending curbs on the property sector there would hurt demand for industrial metals.

The UK mining index fell 2.4 percent, the biggest sectoral decliner, dragged down by major mining companies such as Rio Tinto, BHP Billiton and Anglo American, which fell 2-3.2 percent.

The index lost one percent on Monday and 4.6 percent in less than a week on concern over banks in China, the world's top metals consumer, tightening loans to property developers and other sectors such as steel, cement and construction.

"China is absolutely crucial to marginal demand for industrial metals and there is no doubt that recent macro-economic concerns in China are playing a role in the sector's underperformance," Macquarie strategist Daniel McCormack said.

"But I would probably use the recent pullback as an opportunity to accumulate mining stocks. The earnings momentum has turned, the sector is cheap and is pricing in a weakness in commodity prices. It's a sector that investors have been away from, but are increasingly looking at it now. So it could benefit from fund flows also," he said.

Weaker miners put pressure on the blue-chip FTSE 100 index , which snapped a seven-session winning run and slipped from a one-month high. The benchmark index, which climbed 0.4 percent on Monday, was down 0.9 percent at 6,806.14 points by 1144 GMT. The UK banking index fell 1.4 percent.

Traders said the FTSE 100, which came within striking distance of its record high scaled 14 years ago this week, also witnessed a technical sell-off.

"Many stocks have become overbought and it's not hard to argue that now is a good time to take some profit. These major resistance areas are rarely overcome at the first attempt and some consolidation would not be a bad thing in the short term," Bill McNamara, technical analyst at Charles Stanley, said.

The FTSE 100 has a relative strength indicator (RSI) reading on a nine-day basis of about 70. If a market has an RSI above 70, it indicates it is technically "overbought" and often results in a pullback.

"There are a few exhaustion signals going on, and the RSI looks overbought. It doesn't mean we won't get to that all-time high, but we might just need a bit of consolidation first," Hantec Markets analyst Richard Perry said.

Among sharp movers, GKN fell 2.7 percent, with trading volume at more than double its average 90-day volume - above those for the FTSE where volume only stood at 33 percent.

Although GKN posted a rise in annual profits and forecast continued growth this year, it unnerved some investors by warning on the possible effects of adverse currency movements.

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