UK's FTSE pauses after 3-day rally

Britain's top share index edged lower on Wednesday, having hit two-month highs in the previous session, with US markets closed for a holiday and investors pausing ahead of the Bank of England rates decision due on Thursday.

By 09:51 SA time, London's blue chip index was down 11.67 points, or 0.2 percent, at 5,676.06, after hitting its highest close since early May on Tuesday and having risen 8.6 percent in three trading days as investors readied themselves for more economic stimulus after surprise action last week at an European Union summit to tackle the euro zone debt crisis.

Trading was thin on Wednesday as US markets are closed for the Independence Day holiday.

Banks, whose balance sheets remain under fierce scrutiny but which had been among the sharpest risers over the past three session's as appetite for risk rose, retreated in profit taking, with scandal-hit Barclays down 0.4 percent.

The UK-lender will again take centre stage as the Libor fixing scandal rumbles on with former Barclays CEO Bob Diamond, who only quit on Tuesday, scheduled to appear in front of the Treasury Select Committee answering questions to his role, with traders wondering which politicians he could potentially implicate in the scandal.

The FTSE 100 was also nearing technical resistance providing food for thought for investors who have enjoyed gains over the last few sessions, which has seen the index approach the 61.8 percent retracement of the fall from mid-March, when Spain reignited euro zone debt concerns, to the index's recent low in early June.

The index was also nearing overbought levels, according to its relative strength indicator, as investors had made a beeline for riskier assets since Friday after the EU's crisis-fighting deal helped put gloss on what had been a dire quarter for equity markets, which had retreated in unison on euro zone debt fears.

Weakening macro economic data and falling inflation as well as Friday's crisis fighting measures from the EU has fuelled hopes of rate cut by the European Central Bank and further stimulus measures from the BoE, when they both make their respective interest rate announcements on Thursday.

And with the barrier of inflation less of a concern, the door appears to be ajar for policy makers in the UK to step in and attempt to boost flagging growth.

“What the market has been pricing in over the last few days has been some extra monetary stimulus. It seems as though in terms of the BoE more quantitative easing could be on the cards,” said Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers.

He said equally there is growing hope of a rate cut in Europe and QE3 in the United States, but there remains a slight concern over the second quarter reporting season particularly in the US where Proctor and Gamble and Nike have already underwhelmed.

The earnings outlook remains a worry for investors in UK supermarket retailers too with Tesco and Wm Morrison up to 0.7 percent lower as ING cut its rating on the firms to “sell” and “hold”, respectively.

“UK food retail appears to be an increasingly unattractive sector to invest in with decelerating revenue growth and declining operating margins,” the broker said in a note.

With Wall Street closed, economic data is light but the June UK services PMI is due out at 10:28 SA time with a Reuters poll predicting a reading of 52.8, down from 53.3 in May and, while still in expansion territory, expected to reaffirm the slowing trend. That could support the case for policy action from the Bank of England when it meets on Thursday. - Reuters