UK shares hit two-month high

Britain's top share index hit two-month highs on Tuesday, extending gains into a third session as investors readied for more economic stimulus after surprise action last week at an EU summit to tackle the festering euro zone debt crisis.

But traders said the rally could be short-lived and the market may face downward pressure starting next week as the root problems of the euro debt crisis has not been eliminated.

“It is broadly positive today and we are seeing investors buying this market at this level,” said Joe Rundle, head of trading at ETX Capital.

“There was a resolution on the euro deal but again it has not actually fixed the problem. So people are unsure where to invest and that's why (we are seeing) short-term trading.”

The UK rally also tracked US markets, boosted by stronger-than-expected growth in factory orders last month, lessening concerns about the depth of the downturn in the world's largest economy.

UK trading volumes remained relatively thin at 83 percent of the 90-day daily average. Wednesday's US Independence Day

holiday followed by Thursday's European Central Bank and Bank of England meetings meant investors were reluctant to take new

positions.

The FTSE 100 closed up 47.09 points, or 0.83 percent, at 5,687.73, its highest close since early May.

Miners led blue chip gainers, bolstered by prospects of rising global demand for resources on the back of central banks'

monetary easing. The top performer was Vedanta Resources, surging 6.1 percent.

Barclays saw some of the heaviest volumes, with more than double the usual number of shares traded.

The stock closed down 0.8 percent after a very volatile day, reversing earlier gains after the bank said it had spent almost 100 million pounds on a three-year internal probe into how it had submitted inaccurate Libor interest rate prices, which cost CEO Bob Diamond his job.

RBS, which is also being investigated in the Libor scandal, lost 1.1 percent.

FRESH STIMULUS AHEAD

Recent weak European data has raised expectations that central banks will take fresh policy action this week to stimulate their economies.

The Bank of England (BoE) is widely expected to launch a third round of gilt purchases on Thursday, while the ECB will likely cut interest rates to 0.75 percent from 1.0 percent.

“Now that commodity prices have fallen, there is much more scope for the ECB to cut rates,” said Dominic Rossi, Global CIO Equities at Fidelity Worldwide Investment.

“The downside risk to equities from current levels isn't that great. When the market's gone down to 5,200 on the FTSE, I'd be within 5 percent of writing a buy note, but I can't see the market getting above 6,000 until we solve some of the problems. I would suggest investors focus on low beta and low volatility strategies.” - Reuters