FTSE rises as edgy investors eye EU summit

Britain's top share index rose on Friday, erasing the previous session's losses, as investors took positions ahead of the European leaders' summit on Sunday, where it is hoped progress will be made towards a resolution to the European debt crisis. The FTSE 100 has continued to ebb and flow on the news seeping out of Europe, with twitchy traders taking profits at the mere sign of negative comment and buying back on dips.
London's blue chip index closed up 103.97 points, or 1.9 percent, at 5,488.65, but have been rangebound since early August as investors wait for the catalyst - cohesive agreement among EU members to deal with the debt - to hold above 5,450. Traders said much of the day's gains - albeit in volume just 76 percent of a slim 90-day average - was down to short covering, with investors keen not to be caught out in the event of a change in sentiment among leaders at the weekend.
France and Germany have said a comprehensive solution to the crisis will be discussed on Sunday, but no decisions will be adopted before a second meeting to be held by Wednesday. "Europe's troubles have gone from Greek tragedy to French farce (referring to the lack of unity shown by France and Germany in finding a solution)," said Lothar Mentel, chief investment officer at Octopus Investments, which manages $3.9 billion. "Let us sincerely hope that European politicians will change this impression soon. We urgently need them to stop dithering and start delivering."
Oriel Securities analysts calculated that even with underlying uncertainty, UK equities are deeply discounted. "Based on an assumed outturn for earnings growth over the next 12 months of 0-10 percent, and an assumed price/earnings ratio of 12 times, our market arithmetic continues to suggest UK equities are up to 20-30 percent undervalued at current levels," Oriel said in a note.
The UK's benchmark index took on further gains as Wall Street made headway, despite the annualised growth rate fell to its lowest level in more than a year, while other asset classes seen as safe havens in tumultuous times - such as bunds and the dollar - fell. Miners led the index higher having been sold off in the previous session, helped by some bullish comment by HSBC.
HSBC said it sees copper and iron ore prices settling higher than the stocks are discounting. That is critical for the sector call as catalysts are currently more important than valuation, and iron ore and copper dominate earnings and sentiment. HSBC lifted its recommendation on Xstrata, up 6.2 percent and the top performer on the FTSE 100, to "overweight" from "neutral".
It did, however, cut its rating on BHP Billiton, up 3.5 percent, to "neutral" from "overweight", partly because its enormous capital spending commitments have made the stock less interesting. Elsewhere on the upside, Weir rose 5.9 percent as BofA Merrill Lynch and UBS repeated their bullish stances on the blue chip engineer. "Weir is an attractive investment given exposure to several structural themes, high emerging market sales and financial flexibility. Relative valuation is in line with average levels vs UK stocks, and at a discount to the other high-growth, low cyclicality stocks in Europe," Merrill said in a note.
InterContinental Hotels gained 5 percent, with traders citing the impact of positive comment from Morgan Stanley ahead of the hotel operator's third-quarter results, due November 8. Meanwhile, Thomas Cook leapt 13.1 percent, the top FTSE 250 gainer, after the holiday company said it had struck a deal with its banks as it seeks to recover from a string of profit warnings. WM Morrison Supermarkets shed 0.3 percent as Bernstein Research downgraded its rating for the British food retailer to "market perform" from "outperform" on valuation grounds.