Market Report: Investors dig into miners as broker turns bullish

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A buoyant mining sector helped the FTSE 100 index roar to a two and a half year high yesterday. It was an ultra-bullish note from Citigroup Smith Barney that got investors piling into the likes of Rio Tinto, 53p higher at 1,703p, Antofagasta, 18p better at 1,238p, and BHP Billiton, 22.5p stronger at 679.5p.

A buoyant mining sector helped the FTSE 100 index roar to a two and a half year high yesterday. It was an ultra-bullish note from Citigroup Smith Barney that got investors piling into the likes of Rio Tinto, 53p higher at 1,703p, Antofagasta, 18p better at 1,238p, and BHP Billiton, 22.5p stronger at 679.5p.

The US broker argued that the commodities industry is about to enter a "super cycle", driven by demand from the fast-growing Chinese economy. It believes this boom will generate impressive earnings growth in the mining industry for years to come.

According to Citigroup's analysis, past "super cycles" have been propelled by the rapid economic development of a certain part of the world. So in the 1900s it was the industrialisation of the US that drove commodities demand and mining sector profits, while in the 1950s it was the post-war reconstruction of Europe, and the 1970s boom was a led by Japan's economic renaissance.

Now it's China's turn and the broker tips iron ore, coking coal, aluminium, zinc and gold as the commodities most likely to benefit from this great leap forward by the Far Eastern country. Among Citigroup's favourite mining stocks are BHP Billiton, Rio Tinto and Antofagasta.

TheFTSE 100 closed 53.9 points better at 4,906.2, the blue-chip index's highest level since October 2002. Elsewhere, the FTSE 250 hit an all-time high of 7,225.4, a climb of 59.2 points on the day. The mid-cap index, launched in October 1992, has been a great performer over the past two years, rising in value by 78 per cent compared with a 36 per cent increase by the FTSE 100. It contains the 250 largest companies in the UK outside the FTSE 100.

Meanwhile, City dealing rooms were once again alight with takeover stories. Exel registered the biggest share price move on the back of the speculation, gaining 72p to 873p, as traders bet on a takeover of the company by either Deutsche Post or America's UPS. Such was the demand for Exel stock that early in the session it traded at 900p.

Those who bet on bid situations once again talked of a move by Nippon Sheet Glass on Pilkington, up 1p to 120p. The Japanese company controls 20 per cent of the St Helens-based company. Bizarrely, there were was also suggestions in some quarters of the Square Mile that Baugur, the Icelandic retailer in the process of buying Big Food Group, has now set its sights on J Sainsbury, 3p better at 286p.

Before investors get too excited about this rumour it is worth noting that Sainsbury's is in adifferent league from Baugur's acquisitions so far. To buy the supermarket giant, and that presumes the family Sainsbury's family is willing to sell its 30 per cent shareholding, would cost more than £6bn and analysts are sceptical that the Icelandic group has the firepower for such a deal. They believe Somerfield, off 2p to 156p, is a much more likely target for Baugur.

Smith & Nephew added 12p to 531p after strong fourth-quarter results from its US peer Zimmer. The news raised hopes that S&N's full-year results tomorrow will also impress the market. Dresdner Kleinwort Wasserstein reckons the numbers from the UK group will make pleasant reading for investors. It is convinced that S&N, along with Zimmer, has been taking market share from their rivals Stryker, Biomet and Johnson & Johnson. As it stands, the City forecasts S&N to deliver pre-tax profits of between £275m and £280m for the year just gone.

Northern Rock, off 4.5p to 779p, was undermined by a bearish note from Williams de Bröe. Urging investors to sell the mortgage bank, the broker said it was nervous about the prospects at the group in the medium term and set a price target of just 509p on the stock.

Ulster TV ticked 7.5p to 493.5p on hopes that the broadcaster will soon be bought by either ITV or a US group. Erinaceous rose 3p to 226.5p on suggestions that the group's recent acquisition of Hercules Property has been a success and that brokers will soon have to upgrade their cautious earning forecasts.

In the small cap world, Voller Energy, a manufacturer of portable fuel cell system, had its maiden session on AIM. The company raised £10m at 74p and saw its stock at 77p which values the group at more than £17m. Voller will use the cash to further develop and market its various products.

Finally, punters should keep an eye on bioFusion today. The biotech group is set to debut on the market having raised £8.2m at 150p. BioFusion was formed in 2002 to exploit university-generated intellectual property rights and has signed a 10-year deal with Sheffield University to commercialise its life sciences research.

Market movers

↑ Shell 479p (up 15.5p, 3.3 per cent). In demand ahead of its results this week.

↑ BP 537p (up 14p, 2.7 per cent). Citigroup upgrades its stance to "buy" from "hold".

↑ Barclays 597.5p (up 15.5p, 2.7 per cent). Big speculation continues to drive the stock.

↑ Group 4 Securicor 140.5p (up 6.5p, 4.9 per cent). Buys OneService, the California-based shipper of diamonds and jewellery, for £8.5m.

↑ Europa Oil & Gas 36.5p (up 6.75p, 22.3 per cent). Bullish drilling update from its site in Romania excites.

↑ Eicom 1.05p (up 0.18p, 20.7 per cent). Buys the Performance Channel from Daily Mail & General Trust for £365,000.

↑ Tadpole Technology 8.12p (up 1.25p, 18.2 per cent). Boasts that its Endeavors unit has won a contract worth $2.8m.

↑ Symphony Plastic 19.75p (up 3p, 17.9 per cent). Unveils a distribution deal in Canada.

↑ Murchison United 3.9p (up 0.58p, 17.5 per cent). Denies speculation that it is about to make a major acquisition.

↑ Raft International 12.37p (up 1.5p, 13.8 per cent). Wins a large order for its credit risk management software.

↑ Teather & Greenwood 73.5p (up 5p, 7.3 per cent). Agrees to 75p-a-share bid from the Icelandic bank Landsbanki.

↓ Virgin Mobile 246p (down 19p, 7.2 per cent). The latest suscriber figures from the group disappoint the City.

↓ Woolworths 48p (down 1.5p, 3.0 per cent). Deutsche Bank says it is sceptical that the retailer will be taken over.

↓ Carpetright 1,135p (down 25p, 2.2 per cent). The latest trading statement from the carpets retailer fails to excite.

↓ Empire Interactive 6.62p (down 2.25p, 25.3 per cent). One of the group's biggest shareholders sells his stake .

↓ Epic Group 80.5p (down 9.5p, 10.6 per cent). Altium Securities downgrades its rating to "hold" from "buy" after a profits warning.

↓ New Media Industries 2.62p (down 1.13p, 30.1 per cent). First-half losses widen to £1.1m from £163,000 previously.

↓ Bede 57p (down 1.5p, 2.5 per cent). Profits taking after trading statement.