Britain's FTSE lifted by tobacco stocks, miners

Thu May 22, 2014 4:20am EDT

* FTSE 100 up 0.2 percent

* Sector consolidation hopes boost tobacco stocks

* Upbeat China PMI data lifts miners

* Royal Mail sinks after maiden results

By Tricia Wright

LONDON, May 22 (Reuters) - Britain's top share index advanced on Thursday as corporate dealmaking hopes bolstered tobacco stocks and encouraging data out of China underpinned the miners, outweighing steep falls from Royal Mail after its maiden results.

Further brightening the mood were expectations the Federal Reserve would continue to support the U.S. economy.

The FTSE 100 index was up 14.60 points, or 0.2 percent, at 6,835.64 points by 0804 GMT, trading less than 1 percent shy of its 6,894.88, the highest level since December 1999, when it set a record high of 6,950.60 points.

Deal making activity once again gave equity markets a fillip, with British American Tobacco proving the biggest boost to the FTSE 100 on news it could back a potential merger between Reynolds American and Lorillard.

British American Tobacco rose 2.4 percent, while peer Imperial Tobacco was 1.6 percent higher, also rallying on the deal hopes.

The news, which comes against a backdrop of a burst of deal-making and bids seen in recent weeks, gave strength to a view that the UK benchmark index will reach new highs in the near term.

"FTSE remains underpinned by bid speculation.... Technically looking very good," Lex van Dam, a hedge fund manager at Hampstead Capital, said.

Miners, fuelled by signs of stabilisation in top metals consumer China's wobbly economy, also propped up the FTSE 100, with the country's factory sector turning in its best performance in five months in May, a private survey showed.

Bucking the slightly firmer trend, newly privatised Royal Mail sank 5.8 percent, the biggest FTSE 100 faller by some margin, after it warned on competition as it reported a rise in profits.

Jordan Hiscott, senior trader at ayondo markets said with the shares having recently been at the upper end of their recent range, and some 70 percent above the 330 pence flotation price, the figures would have needed to impress to drive further gains.

"This morning's release of the headline figure for the full year pre-tax profit, coming in at 363 million pounds ($613 million), instead of the expected 400 million shows increasing challenges in the face of competition.... My six-month valuation reflects this, with a price target of 465 pence," he said.

Royal Mail's shares are currently trading at 541.5 pence.

($1 = 0.5925 British Pounds) (Reporting by Tricia Wright; Editing by Toby Chopra)