LONDON MARKETS: British Stocks Rise On Mining Rally

By Aude Lagorce

LONDON (MarketWatch) -- London shares advanced Monday afternoon, supported by a rally in the mining sector, as investors awaited the verdict of the U.S. Federal Reserve on a potential new round of quantitative easing.

The FTSE 100 index fluctuated between gains and losses throughout the morning but turned decidedly higher in early afternoon with the release of better-than-expected U.S. manufacturing data. The index gained 0.5% to 5,702.27 in recent trading.

The surprise improvement fueled investors' confidence in the strength of the global economic recovery and helped mining shares extend a rally started with the publication of solid Chinese manufacturing data overnight.

Shares of Xstrata PLC gained 3.3% and Kazakhmys PLC added 3%.

The strong U.S. data also helped U.K. investors shrug off their disappointment that quantitative easing likely won't happen in the U.K. in the near future as economic indicators improve.

"The market opened very strongly on the back of the Chinese data but quickly pulled back after better-than-expected U.K. PMI, which is the final nail in the coffin for more quantitative easing on this side of the Atlantic," said Richard Perry, strategist at Central Markets.

The Bank of England holds its policy meeting on Thursday. Better-than-expected economic data will fuel the case for not pumping any more money into the economy at this stage.

"Every bit of good U.K. economics news is bad news as it makes another round of quantitative easing unlikely," Perry said.

While the Bank of England decision on Thursday is important to investors, it ranks second to what the U.S. Federal Reserve does on Wednesday. It is widely expected to launch a new bond-purchase program.

There was a pocket of strength in the financial sector, with shares of Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC climbing more than 2%.

Shares of recruitment companies Hays PLC and Michael Page International PLC clocked gains of more than 3% after Credit Suisse upgraded its recommendation on both stocks to outperform, citing their exposure to international markets.

Also on the upside, shares of chip maker CSR PLC rose 2.3% on the back of an upgrade from Morgan Stanley. The broker lifted its rating on the stock to equal-weight, saying many of the negative issues the company faces are already discounted in the share price including market-share loss in the wireless segment.

One of the main decliners on Monday was Serco Group PLC . Shares of the outsourcing company fell nearly 6% after it abandoned plans to pass on the impact of government spending cuts to suppliers.

Another loser, outside of the main index this time, was Ryanair Holdings PLC (RYAAY), which declined 3.4%. Europe's largest low-cost airline reported a 32% increase in second-quarter profit and lifted its guidance for the year but cautioned it has little visibility on ticket prices in the fourth quarter.