Market Report: Rumour-mongers dig into Alcoa on bid talk

It has been a while since the last big deal in the mining industry, Xstrata's C$19.2bn acquisition of Falconbridge in August. There could be an even bigger deal in the pipeline if Rio Tinto or BHP Billiton bid for the world's largest aluminium producer, Alcoa.

The rumours were certainly being taken seriously across the pond, with Alcoa shares sharply higher in morning trade on Wall Street. Alcoa's current market capitalisation of $30bn is just over half that of Rio Tinto and BHP so traders believe that a deal that size is not beyond the limits of either London listed group. However, not everyone in London took the story seriously. One trader said: "BHP has just committed to returning $10bn to shareholders and is yet to appoint a new chief executive. Unless Rio Tinto makes a move and forces BHP to act I expect this rumour will pass without any serious enquiries." Rio Tinto closed 67p at 2,753p while BHP added 27p to 1,076p.

A mild bout of profit taking at Vodafone knocked the shares back 1.25p to 150p, but most analysts were drooling over the Hutchison Hassar deal. The price tag came in about $3bn lower than some had feared and calls for the head of chief executive Arun Sarin, so prominent 12 months ago, are now falling on deaf ears. Nomura and Dresdner Kleinwort both urged their clients to buy, with Dresdner upping its target to 173p and calling the stock its "top sector pick".

Smith & Nephew were in focus as German broker Deutsche Bank upped its target price for the medical devices and wound dressings group to 670p from 590p. The broker told clients that the shares could appreciate by 15 per cent per year over the medium term. The shares rallied 6.75p to 619p, a new high.

Cautious comments on the market outlook from British Land took the shine off a strong set of third-quarter numbers and encouraged more profit-taking across the sector. Liberty International, due to report on Thursday, shed 36p to 1,290p, with Slough Estates not far behind following an 12p slide to 771p. Meanwhile British Land was the worst-performed in the blue chips, shedding 60p to 1,619p despite bullish comments from Merrill Lynch and Oriel Securities.

The London market rebounded after Monday's mild sell-off but many investors stayed on the sidelines, unwilling to commit new money to the market following its strong run from the second half of January. The FTSE 100 closed 28.3 better at 6381.8.

Second-line oil stocks were out of favour as the oil price dipped again on warmer weather in the US and speculation that Opec will not cut production in March. There were also rumours that North Sea production is falling faster than expected, encouraging sellers of Soco International, 35p lower at 1,191p, Venture Production, 18.5p worse at 697.5p and Tullow Oil, 3.75p weaker at 405.25p.

Mytravel Group rose again on follow-through buying from Monday's announcement that the company will merge with Thomas Cook. However, the US investment bank Merrill Lynch believes that most of the benefits are already priced into the shares and that benefits from new management and the merger will not become apparent until later in the year. It reiterated its "neutral" stance on the shares as Mytravel closed another 15p firmer at 321p. FirstChoice, on the other hand, is still finding a level after Friday's sell off and Merrill cut its price target to 290p as the shares fell another 4p to 260p.

Credit Suisse initiated coverage of bicycle and car accessories retailer Halfords with an "outperform" rating and a 435p price target. The company has performed strongly in a tough retail environment since coming to the market in May 2004 following a period in the hands of a private equity consortium. The Swiss broker believes that the company has solid defensive qualities and strong earnings momentum. The shares climbed 4.5p to 380p.

In the small caps, CEPS, formerly known as Dinkie Heel, surged 12.5p to 62.5p following a consolidation on a 50 for 1 basis. The move follows a successful Emergency General Meeting on Monday to confirm the acquisition of privately held packaging group Sunline Direct Mail for £4.3m. However, the stock is very tightly held and only 13,000 shares changed hands.

Small cap investors will be on the lookout for Hexagon Human Capital as the temporary management placement group begins trading later this week. The shares are expected to begin trading tomorrow following a placing by the broker Brewin Dolphin. The initial public offering planned to raise between £8m and £12m of new money for the company at 165p per share. The issue was oversubscribed and traders expect the stock to make a strong start based on bullish recent trading statements from the recruitment sector.