Market Report: Miners drive FTSE 100's end-of-month rally

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The Independent Online

The mining sector led blue chips higher, with Xstrata rising by 4.4 per cent to 826.5p, as the FTSE 100 regained its composure following two sessions in the red. The miner gained ground as investors bought in on recent weakness. The trend was helped by words of support from Morgan Stanley, which raised its target price for Xstrata to 1,197p from 1,160p on account of higher ferrochrome volume and price assumptions.

"This is [an] upside that we had not built into our investment thesis, and we think it illustrates some of its hidden optionality," the broker said, highlighting the fact that Xstrata was one of the world's three largest ferrochrome producers.

In the wider sector, Kazakhmys rose 5.5 per cent or 51.5p to 988.5p as analysts weighed in on its interim results, which were published on Thursday. Deutsche Bank raised its target price for the stock to 859p, from 769p, while Bank of America-Merrill Lynch revised its target to 1,300p from 1,250p. "Kazakhmys is our preferred copper leverage, trading on just seven times our [forecast earnings for 2010] versus Antofagasta on 11 times," Merrill said, reiterating its "buy" stance.

Overall, the push from the mining sector helped the FTSE 100, which is up almost 7 per cent over the month, rise by 39.55 points to 4,908.9 – a new high for the year. The mid-cap FTSE 250 index was also strong, gaining 1.3 per cent, or 116.18 points, to 8,817.51. Sentiment was strong following the release of official figures showing that the economy shrank 0.7 per cent, as opposed to an initial estimate of 0.8 per cent, in the second quarter.

Although some, citing the strength in the markets in recent weeks, have begun to worry about the prospect of a sharp pullback in equities in September, Citigroup strategists reckon further gains may be forthcoming in the months ahead. "Aggressive policy and less bad macro data propelled the strong risk rally. Depression seems priced out. But recovery does not look priced in," they said. "Many challenges still lie ahead. But we back decent returns from European equities over the coming 12 to 18 months."

The news boosted the market's appetite for risk, with investors piling into financial plays. Lloyds, which remained the focus of speculation that it was looking at ways to reduce its reliance on the Government's Asset Protection Scheme, was the biggest beneficiary of the trend, rising by 6.3 per cent, or 6.64p, to 111.34p and claiming pole position on the benchmark index. Royal Bank of Scotland, up 3.8 per cent, or 2.1p, at 57.65p, continued to rise above the average price of 50.5p that the Government paid for its stake. Barclays, which outperformed the wider sector the session before, was also strong, adding another 3.1 per cent or 11.35p rise to 380.25p.

BAE Systems closed up 6.2p at 312.2p despite having fallen as low as 294.2p earlier as analysts weighed news of its failure to win a follow-on FMTV, (family of medium tactical vehicles) contract from the US Department of Defence. "BAE's existing contract continues to the fourth quarter of 2010, hence we expect no real earnings effect in 2009 and 2010," said Deutsche Bank, which scaled back its target price for the stock to 420p, from 445p. "However from 2011, the $2bn of FMTV revenues will cease which, when factored into forecasts, see a 2p or 5 per cent cut to our [forecast earnings per share for 2011]."

Of the others, Nomura reduced its target price for BAE to 450p from 475p, while Bernstein moved it to 370p from 380p.

Elsewhere, on the FTSE 250, the soft drinks group Britvic stood firm, gaining almost 2 per cent, or 6.4p, to 346.6p, after UBS reiterated its "buy" stance. "As the economy and soft drinks market recovers, Britvic can still grow sales," the broker said, raising its target price for the stock to 400p, compared to 330p previously.

The Lloyd's of London insurer Hiscox climbed to 338.1p, up almost 3 per cent, or 9.6p, after Citigroup abandoned its negative stance, moving the stock to "hold" from "sell" in light of the company's interim results.

"Given the higher levels of business written in the first half of this year, the nature of the current North Atlantic hurricane season will likely be key to full-year results," Citi, which raised its target price for the stock to 325p from 300p, said.

National Express fell 10.2p to 398.4p after rejecting the 450p per share offer recently put forward by the consortium representing the Cosmen family and the private equity group CVC. "We believe that we can create more value for shareholders by remaining independent and refinancing the group," the executive chairman, John Devaney, said, as expectations rose that the group will raise cash via a rights issue.

Arbuthnot reiterated its "neutral" stance on the transport group, saying: "Given the conditions attached to their approach, we would be surprised if the CVC/Cosmen consortium were to return with a higher offer with fewer conditions. We also consider it unlikely that any other party would be willing to contemplate a bid for National Express given the ongoing uncertainty surrounding the retention of the East Anglia and c2c rail franchises after the group defaults on the East Coast franchise (likely later this year)."