Market Report: Dealers dump miners on downturn concerns

A wave of selling, prompted by fears the commodities boom may be petering out, left the FTSE 100 77 points lower at 5,265 yesterday.

Rio Tinto, down 100p to 2,168p, Anglo American, down 74p to 1,584p, and Xstrata, 57p weaker at 1,325p, led the blue-chip gauge to close below 5,300 for the first time in six weeks.

BHP Billiton, 38.5p lower at 804p, did not help matters by warning that its forecast for oil and gas production would disappoint because ofdamage to its facilities sustained in the Gulf of Mexico by hurricanes Katrina and Rita.

Investors worry that recent commodity price gains have been driven by speculative buying from investment companies rather than underlying physical demand.

To what extent this is true will become apparent in spring when long-term contracts between producers and consumers of bulk commodities such as iron and coal are due to be decided.

Traditionally, October is one of the worst months for the stock market, and many traders used yesterday as an opportunity to take profits from some of the City's best-performing shares. It was no surprise that those companies which have recently been touted as vulnerable to takeover saw their share prices hit particularly hard. BOC dropped 18p to 1,083p, O2 fell 4.5p to 157.5p, Pilkington lost 4.5p to 124.5p, and Whitbread slumped 25.5p to 956.5p.

The FTSE 250 was by no means spared, falling 133 points to 7,622. Dresdner Kleinwort Wasserstein believes the stocks that comprise the second-tier index are overvalued relative to blue chips. It points out that the FTSE 250 trades at a 30 per cent premium to the FTSE 100, and took the view that the companies which make up the FTSE 250 will struggle to generate the earnings growth needed to justify such a rating.

Among large caps, Boots bucked the negative trend, gaining 2.25p to 628.5p, on hopes the beauty-products retailer could soon receive a private-equity bid. One dealer said: "The terms of Boots' merger with Alliance UniChem should mean that its shares trade a lot lower than current levels. The fact that they do not means that someone out there believes that the Alliance UniChem tie-up is not the only deal in town."

Reuters rose 1p to 375p as Lehman Brothers became the latest broker to make positive comments about the information provider in the run-up to its third-quarter results on 27 October. The US broker expects Reuters to deliver an 8 per cent year-on-year increase in sales, and predicts its management will release an upbeat outlook statement. This, it hopes, will act as a catalyst for the stock, which it tips to outperform the market going forward.

BSkyB held steady at 524p as the satellite broadcaster launched a £1bn bond issue. Speculation was rife regarding what Sky intends to do with the proceeds. Some suggested that the group is looking to use the cash to enter the broadband market, while others reckon it will fund a major share buy-back programme.

Next dropped a further 29p to 1,268p as Deutsche Bank removed the retailer from its pan-European focus list. The broker fears that substantial value is unlikely to materialise from the stock until there are signs that the UK consumer environment has improved. Deutsche suspects this Christmas will bea tough one for the group.

Somerfield ticked 2p higher to 187p as word spread that a consortium of Apax Partners, Barclays Capital and the property investor Robert Tchenguiz will unveil a formal bid today for the convenience-store operator.

The consortium has been set a deadline of today by the Takeover Panel to announce the details of its offer. According to market professionals, the bid will be pitched at about196p a share, valuing Somerfield at more than £1bn.

Business Post slumped 21p to 400.5p as Altium Securities told its clients that things are likely to get worse at the mail-services group before getting better. Last month, Business Post issued a major warning on profits, and although at the time its management indicated that volume decline had stabilised, Altium is not convinced by this. "We fear that the downward trend has continued, and further gloomy news from the retail and technology sectors suggest that the key Christmas period may be poor," the broker said.

Also, Altium worries that the well-flagged operational problems at Business Post might be used by the company's competitors as a way to win back customers. The broker said it would not be surprised to see a further profits warning from the struggling group.

Finally, March Networks gave up 20p to 800p as investors fretted about the forthcoming expiry of a stock lock-up.