Market Report: Diving US dollar hits Amlin insurance group

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Amlin fell as investors concerned about growing weakness in the US dollar began selling off non-life insurance stocks last night.

Numis weighed in, highlighting the negative impact of recent currency movements, as about 60 per cent of premium income is typically denominated in dollars. "The sterling value of US profits are therefore sensitive to the [pound-dollar] rate and will be impacted by the recent weakness in the dollar," the broker said, adding that earnings were likely to be affected by foreign exchange-related losses "on a number of levels".

"As well as the part-reversal of gains on non-monetary assets booked in 2008, the recent move in the [pound-dollar] rate will create new foreign exchange losses," Numis said. "Simplistically, the 2008 numbers were significantly enhanced by a move in the rate of around 35 per cent, about one-third of which has since reversed and will therefore be a negative in full-year numbers for 2009."

Factoring in the potential impact, the broker switched its stance on Amlin, which closed 7p lower at 342.75p, from "add" to "hold". Numis also downgraded Catlin, which fell to 335p, down 20p, after being moved from "buy" to "add".

Overall, investors were in buoyant mood and optimistic about the global economy, with the FTSE 100 rising by 2 per cent, or 88.25 points, to 4,506.19 and the FTSE 250 gaining 2.5 per cent, or 186.58 points, to close at 7,758.58.

Traders attributed the buying to another round of improved economic data, particularly from China, where the official purchasing managers' index [PMI] remained above 50 – the dividing line between contraction and expansion – for the third month in a row. Britain's manufacturing PMI also improved for a third consecutive month. Analysts at Cazenove said the fact that domestic data chimed with reports from overseas suggested that there might be a "materially stronger outturn for gross domestic product in both the UK and globally in the current quarter compared to that seen in the first".

The read-across was the strongest in the mining sector, where leading stocks bounced on hopes of a recovery in demand for commodities as general economic conditions improve. Xstrata, the Anglo-Swiss mining group, was the strongest of the lot, rising by 72p, some 10.5 per cent, to 756p, while Vedanta Resources, the India-focused miner, strengthened by 9 per cent, or 143p, to close at 1733p.

Confidence in the economic picture led to a commensurate rise in the appetite for risk, which helped to drive up financial stocks, including those in the banking and insurance sectors. Legal & General was one of the strongest, rising by 8 per cent, or 4.8p, to 65.2p. Old Mutual climbed by 7 per cent, or 5.1p, to 78.4p, while Barclays gained 6.3 per cent, or 18.7p, to 316.25p. Lloyds was also strong, advancing 4.5p, or 6.6 per cent, to 72.5p.

HSBC lagged behind, however, retreating by 4.5p to 552p following reports that officials in Saudi Arabia had ordered the kingdom's banks to freeze the accounts of Mann al-Saena, the chairman and chief executive of the Saad Group conglomerate, who owns a stake in HSBC.

A healthier appetite for risk also weighed on defensive plays such as BAE Systems, which fell 6.75p to 335p, and Autonomy, which was 11p behind at 1527p.

Further afield, Arbuthnot weighed in on transport stocks, initiating coverage on Firstgroup, which was 20p ahead at 390p, with a "strong buy" recommendation. "Debt levels are higher than ideal but the group has refinanced successfully (no refinancing until 2012) and the financial leverage amplifies the recovery in earnings we are forecasting next year," the broker said. "Importantly, this rebound is driven by the unwinding of the group's expensive fuel hedging and steady progress in the non-cyclical US school bus business, and not any improvement in the economy."

The broker also issued a "strong buy" rating on Stagecoach, which eased back slightly to 130.25p, a fall of 0.25p.

Elsewhere, the housebuilder Persimmon was up 4.9 per cent, or 17.7p, at 381.75p amid rumours of a possible rights issue . The chatter followed a Citigroup circular last week which highlighted the possibility of a capital raising of between £100m and £300m.

The wider construction sector also remained firm, following a report which suggested that the fall in UK house prices had stabilised last month. As a result, Barratt Developments rose by 9.2 per cent, or 14.5p, to 173p and Bellway climbed by 3.5 per cent, or 22.5p, to 668p.

On the downside, the Newbury-based business software company Micro Focus International fell 6.7 per cent, or 26.5p, to 368.75p after it emerged that Borland Software Corporation, the company it agreed to buy last month, had received a rival offer from a financial buyer. Among smaller companies, the supermarket supplier Finsbury Food rose by 1p, or 4.7 per cent, to 22.5p after revealing a preliminary bid approach. The company did not name the suitor and sounded wary, saying: "The directors believe there is considerable doubt that an offer will be forthcoming from his party."