China fund report gives FTSE a fillip, summit eyed

LONDON (Dec 9): Britain's top shares rose on Friday, reversing
initial losses, fuelled by hopes a new Chinese investment vehicle could
be used to help alleviate the impact of the euro zone debt crisis, as
investors awaited the outcome of a crucial EU summit.

A source told Reuters China's central bank plans to create a new
vehicle to manage two investment funds worth a total of $300 billion,
one targeting investments in the United States and the other focused on
Europe.

"I guess they're hoping that China's going to be the white knight
that rides to Europe's rescue," Joe Rundle, head of trading at ETX
Capital, said.

"I think in time China will probably step in and have an effect on
Europe, but it's going to be very much on China's terms rather than
European terms."

The UK benchmark index had oscillated in and out of negative
territory earlier as hopes waxed and waned a European summit would take
big strides towards solving the region's debt crisis.

At 1305 GMT, the FTSE-100 index was up 18 points, or 0.4 percent, at
5,502.21, led by banks, having recovered from an intra-day low of
5,440.86. Volumes were thin.

The index has gained about 7 percent over the past two weeks on
mounting expectations of an imminent solution to Europe's debt crisis.

Disappointingly for investors, European leaders have failed to agree
on a treaty change and decided to cap the euro zone's permanent bailout
fund, with the fund also not aiming for a banking licence that could
have increased its firepower.

Summit talks resume today, but some market participants saw little
cause for reassurance, taking the view there would be no rapid solution
to the euro zone's debt crisis.

"I don't think we're going to get many more announcements (from the
summit). I think the more helpful thing is to get more from the ECB ...
The market's increasingly sceptical about whether politicians can
deliver much more in the short term," said Colin Mclean, managing
director of SVM Asset Management, which has around 700 million pounds of
assets under management.

Sentiment was dented on Thursday when European Central Bank President
Mario Draghi cooled market expectations about the prospect of an
acceleration in ECB bond purchasing, although the bank did cut interest
rates by 25 basis points to 1 percent.

"There's been quite a lot of scrambling to cover shorts, and I think
probably a lot of institutions are quite underweight on banks (which are
deleveraging quite sharply in Europe now), so there's more potential
upside in that sector," Mclean said.

After suffering hefty falls in the previous session, banks staged a
recovery, with Lloyds Banking Group , Royal Bank of Scotland and
Barclays grabbing the top three spots on the leader board, climbing
4.6-5.9 percent.

Among fallers, GlaxoSmithKline shed 1 percent after its drug Tykerb
failed to hit its goal in a clinical trial testing its role in women
with early breast cancer, dimming hopes for its use in this setting.

On the second line, African Barrick Gold was a significant laggard,
down 3.1 percent, as the miner said it would fall short of its 2011
production target because of escalating power disruptions to national
grid electricity supply in Tanzania.

UBS strategists said the recent market moves probably reflect some
pricing out of extreme negative scenarios, "but risks remain".

"We believe the market is priced for a small decline in earnings next year," UBS said.

"While we see upside to end-2012 (target 6,100 for FTSE 100), we
believe that we would need to see a big positive surprise from EU
politicians to push convincingly through this range-bound market in the
near term."

UBS said that positive developments from the EU leaders could lead to
a number of financials and mining stocks performing well, while
consumer staples, utilities and pharmaceuticals should outperform if the
crisis deepens.

The FTSE 100 currently trades on a price to earnings ratio of 9.9
times, compared with a historical average of around 14 times, and a
price to book ratio of just 1.57, according to Thomson Reuters data. Its
dividend yield of 4.15 compares favourably to those offered on "safer"
euro zone and U.S. bonds.

Atif Latif, director of equities and derivatives at Guardian
Stockbrokers, sees downside risk to the index's consolidated low at
5,362, then to 5,200/5,100, the base for the last rally, on negative
news out of the summit, while good news may trigger a re-test of its
recent high at 5,632.

Traders said that if, on the other hand, no news of particular
consequence were to emerge from the summit, this would only trigger a
'small down' on the FTSE 100, although the index would remain reasonably
volatile.