LONDON (Reuters) - The FTSE 100 hit new 4-1/2 year peaks on Tuesday, with a strong rally in miners outweighing concerns about continuing problems in the banking sector.
U.S. data offered fresh proof of improvement in the world's biggest economy, with a strong pick-up in housing prices following above-forecast durable goods data the previous session.
The numbers supported oil and copper prices, in turn boosting Britain's heavyweight energy and mining stocks, which together added some 13 points to the FTSE 100.
The benchmark UK index closed up 44.78 points, or 0.7 percent, at 6,339.19, posting its best finish since May 2008 as traders used a mid-session dip as an attractive entry point.
With the FTSE 100 already up 7.5 percent since the start of the year and in overbought territory on the 7- and 14-day relative strength indexes, some analysts are warning that the case is building for a correction or at least a consolidation, and recommending that investors look to book profits.
But so far, the market has continued to grind higher, posting gains in eight of the past nine sessions.
"We are looking very strong at the moment, it seems we are shrugging off any bad news ... The miners are having a good day, we've some good data out, particularly form America," said Jonathan Roy, a broker at London Stone Securities.
"I think we will see a correction at some point, it will be a surprise that gets us moving back down towards 6,000. (But) for the moment I would probably be moving up stop-losses rather than taking profits."
In a sign of continued investor optimism, implied volatility on the FTSE 100 - which tracks the prices investors are willing to pay for option protection - held near six-year lows.
"If you look at it from an asset allocation perspective, the expected returns from government bonds are going to be much lower this year than they were last year and expected returns from equities relative to other assets look more attractive and that is helping to improve sentiment," said Darren Winder, equity strategist at Oriel Securities, who sees the FTSE 100 rising to 6,700 points by year-end.
The latest rally and the improved sentiment have put corporate news back in the limelight after months of all stocks moving in the same direction depending on risk appetite.
As such, investors welcomed greater clarity from Anglo American on its troubled Minas Rio iron ore project, helping shares in the miner to add 3 percent.
In contrast, banks suffered, with Royal Bank of Scotland off 6 percent after the Wall Street Journal reported that the lender is close to a 500 million pound settlement with U.S. and British authorities over Libor, returning the interbank rate-fixing scandal to the front of investors' minds.
With UK banks already up some 11 percent since the start of 2013 the concerns about problems in the financial sector gave a cue for some profit-taking. Cautious comments from several investment banks also weighed on sentiment.
"While systemic and regulatory risks have receded, the operating environment remains difficult in the face of a weak economic outlook," analysts at Espirito Santo said in a note, downgrading both RBS and Lloyds to 'sell'.
Editing by Stephen Nisbet