Market Report: Drax switched off as brokers lure the bears

A round of negative broker comment ensured a negative ending for Drax, the power station operator which fell nearly 11 per cent at one point yesterday.

Goldman Sachs issued a warning on valuation, moving the stock to "neutral" from "buy", while JP Morgan Cazenove, worried by the outlook for UK gas prices, switched its stance to "underweight" from "neutral". JP Morgan said that while the stock, which closed 15.7p lower at 398.2p, had outperformed the European utilities index over the past three months, UK power prices for winter 2011/12 had declined by nearly 10 per cent, giving grounds for concern.

"In our view, the risk to UK gas and hence power prices heading into the winter is skewed to the downside," the broker said, pointing to factors such as UK gas inventories, which "have rebounded from their March lows and are now close to their three-year average". The outlook for UK gas is also clouded by the pace of liquefied natural gas imports, which saw strong month-on-month growth in August, and by the fact that 12-month forward prices are "now trading at a 60 per cent premium to US prices", the highest level since mid-2008, according to JP Morgan.

Overall, the benchmark turned lower, with falling commodity stocks driving the FTSE 100 to 5,555.56, down 11.85 points. The mid-cap FTSE 250 index fared better, adding 21.83 points to 10,494.27 by the close.

The miners were broadly under pressure, with softer commodity prices weighing on sentiment. Metals eased on the back of a jump in the US dollar after the Bank of Japan stepped into limit gains in the yen. Lonmin was among the weakest, losing 31p to 1,669p, while Xstrata fell to 1,160p, down 10p, and Kazakhmys lost 8p to 1,355p. The Eurasian Natural Resources Corporation, which was in focus as First Quantum Minerals sued the company over claims relating to assets it recently bought in the Democratic Republic of Congo, was also held back, shedding 18.5p to 866p.

African Barrick Gold, down 21p at 598p, fell to the bottom of the FTSE 100 as traders banked profits following a recent spike in the gold price. The weakness came against the backdrop of some cautious commentary from the billionaire investors George Soros, who said that while gold prices may continue to rise, "it will be very interesting to see if there is a decline in the next few weeks.... It's certainly not safe and it's not going to last forever".

Elsewhere, banks, which have been attracting interest following recent agreement on new capital rules, mostly held back amid a dip in the market's appetite for risk. Barclays was the weakest of the lot, heading south by 7.25p to 316.75p, while the Royal Bank of Scotland fell to 49.66p, down 0.49p. Lloyds proved the most resilient, edging up by 0.2p to 77.34p. In the wider financial sector, inter-dealer brokers were in focus as the market attempted make sense of new EU rules to control derivatives trading.

Icap, which was downgraded to "neutral" from "buy" at UBS on valuation grounds, was slightly lower at 454.7p, down 3.3p, while Tullett Prebon was 3.4p higher at 398.4p.

Retailers dominated the upside, with investors piling in after the high street fashion chain Next indicated that market conditions hadn't worsened in recent weeks. The comments boosted the mood across the sector, which has been the focus of growing concerns about the prospects for consumer spending in light of the Government's cost-cutting drive and the upcoming rise in VAT.

Next was the strongest of the lot, swinging to pole position on the benchmark index with a 6.7 per cent, or 136p, gain to 2,176p. High-street bellwether Marks & Spencer was the second strongest blue chip of the day, adding 12.6p to 379.6p, while Kingfisher, the home improvement retailer behind the B&Q chain, secured third position, swelling by 7.2p to 218.9p.

Further afield, the pubs group JD Wetherspoon lost 16.6p to 421.7p after JP Morgan lowered the stock to "underweight" and UBS, while sticking with its "buy" stance, scaled back its target price to 525p from 560p. JP Morgan said it was cutting its earnings estimates for 2011 by 13 per cent to account for a cautious outlook for sale, particularly after VAT goes up to 20 per cent at the beginning of next year. "The early impact of VAT increases on trading should be apparent in the first-half trading update in March 2011," the broker added, keeping its target unchanged at 406p.

Rightmove, the property website, which was buoyed by a round of bid speculation following an offer for French peer Seloger.com at the end of last week, was 5p behind at 730p last night, easing after UBS said it considered the valuation "to be broadly up with events". The broker argued that German media group Axel-Springer's offer for Seloger did serve to highlight the attractiveness of property portals, but Rightmove was unlikely to be snapped up in the near term.

"An acquisition would likely be highly dilutive for any media or newspaper group given the rating at Rightmove," UBS explained, revising its recommendation on the stock to "neutral" from "buy", albeit with an unchanged 750p target price.