Market Report: 3i rallies on hopes of FTSE 100 re-entry

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3i, the FTSE 250-listed private equity group, surged ahead last night, rising by almost 12 per cent amid hopes that it may rejoin the ranks of blue chips in the upcoming index review.

The company was kicked out of the FTSE 100 earlier this year, after worries about debt and the value of its investments played havoc with its share price. But the stock, which gained 11.8 per cent or 26.5p to 251.5p, has bounced back, thanks in part to the announcement of a fully underwritten rights issue, and the upturn in the wider market.

Traders last night said the advance – 3i shares are up over 40 per cent since the beginning of April – meant that the company was well positioned to re-enter the index in the next review, the results of which are due after close on Wednesday.

London Stock Exchange, up 5.2 per cent or 40p at 811.5p, and Wolseley, up 8p at 1,073p, may also re-enter the FTSE 100, while Liberty International, down 2.5p at 417.5p, and Amlin, down 2.75p at 336.75p, are among those that may be moved down to the FTSE 250.

Overall, the FTSE 100 was 1.2 per cent or 51.62 points ahead at 4,438.56, while the FTSE 250 climbed to 7,747.33, up 1.1 per cent or 87.26 points, as traders welcomed a report on US unemployment. According to the US Labor Department, American employers axed 345,000 jobs last month, well below a market estimate of more than 500,000, and the smallest decline in US payrolls in eight months.

On the FTSE 100, Rio Tinto, up 10.3 per cent or 281p at 3,001p, was among the strongest performers of the day as it was confirmed that – in line with recent market rumours – the controversial Chinalco fundraising deal was off the table; instead, the miner launched a mammoth $15.2bn share sale, and struck an iron ore joint venture with BHP Billiton, up 6.8 per cent or 99p at 1555p.

Some questioned the size of the equity issue, with Merrill Lynch analyst Jason Fairclough terming it "excessive", considering that the Chinalco deal was worth a total of $19.5bn (£12bn), while the share issue combined with the other measures were set to raise more.

Michael Rawlinson, the head of mining at Liberum Capital, said, in response to such questions on a conference call: "Rio highlighted the timing and valuation risks with its ongoing divestiture programme and the continuing uncertain macroeconomic outlook. The message appears to be that the company is taking full advantage of more open and buoyant capital markets, and having lived through the trauma of late 2008, prefers to take a conservative approach. Additionally, the iron ore joint venture is a conditional deal, and Rio likely recognises the risks surrounding the timing and completion of the iron-ore JV, preferring to raise enough equity to satisfy debt requirements in case the JV runs into issues with regulators."

Elsewhere, oil prices touched a new seven-month high above $70 per barrel, which boosted the likes of Royal Dutch Shell, up 1 per cent or 16p at 1700p, and BG, up 3.5 per cent or 39p at 1162p. Investors in the sector were also pleased with a new Goldman Sachs circular – the broker upped its oil price forecasts, predicting $59 per barrel oil for the current year, compared to $50 previously, and $80 per barrel oil for the year after, compared to $70 previously.

BG itself was the focus of a Société Générale "buy" note, with the broker saying that although investors should watch out for a weak liquefied natural gas (LNG) market, BG's performance relative to the wider oil sector through to the end of this year was likely to be driven by updates on upcoming oil exploration & production projects, instead of LNG-related newsflow.

On the downside, retail plays were held by a round of profit-taking, as investors moved to secure recent gains, sending B&Q's owner, Kingfisher, which has been trading higher on the back of a well-received update, to 195.2p, down 1.4p, and Argos's owner, Home Retail Group, which is expected to follow suit and post a positive update next week, to 250p, down 2p.

Further afield, on the mid-cap index, PV Crystalox Solar was almost 2 per cent or 1.5p heavier at 84.5p, thanks to Goldman, which added the silicon wafer manufacturer's stock to its "conviction buy" list. "Following the May 15 profit warning, we believe the share price is now reflecting too great a risk that [PV Crystalox] will see further wafer price falls and order deferrals," the broker said.

Also on the FTSE 250, Heritage Oil, the oil company which requested a temporary suspension of its shares on Wednesday, was the focus of market speculation, with some suggesting that Genel Enerji, a Turkish company, may be the unnamed bidder behind the merger approach confirmed earlier this week.

Among smaller companies, Condor Resources was 3.6 per cent or 0.03p firmer at 0.73p after the AIM-listed gold and silver miner turned down an unsolicited all-share offer from Plus-listed Worldwide Natural Resources.