Market Report: Rio rises as commodity bulls fight their corner
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Wednesday 16 November 2011
Rio Tinto was among the gainers at the end of a mixed session for the mining sector last night. The stock was 35p better off at 3,458p, rising along with rivals such as the Eurasian Natural Resources Corporation, which was 3p firmer at 679.5p at the close of play.
But not everyone ended in the black; Glencore, for instance, was 15.85p worse off at 412.65p, while Xstrata, which is part-owned by Glencore, lost 13.7p to 998.3p. The mixed fortunes came despite some positive commentary from one of Wall Street's best-known commodity bulls, with Goldman Sachs saying that it still expected prices to rise over the next year.
"Notwithstanding the continuing European crisis, we maintain our view that global growth will provide enough support to demand to drive key commodity prices higher over the next 12 months," Goldman analysts said. "Confidence in this view has been reinforced by the recent shift in policy in China towards a looser stance, which will likely help support economic growth and, in turn, commodity demand."
Overall, investors endured a volatile session. The morning saw further falls on the FTSE 100, with the European crisis keeping the bulls at bay. But markets cheered up after the release of better-than-expected US data, with reassurance on the world's largest economy helping the benchmark to close broadly flat at 5,517.44, down 1.6 points. The data, which showed that retail sales had climbed in October, did little for the FTSE 250, however, with the mid-caps falling back by 87.65 points to 10,260.11.
Burberry took the FTSE 100 wooden spoon, shedding 74p to 1,347p amid profit-taking in the wake of the luxury retailer's half-yearly results; although the figures were positive, the stock has climbed strongly in recent days. "Having been hit in mid-September by market concerns over global growth, the shares have rallied from 1,092p since the end of September after repeated luxury companies reassured on the underlying market strength," Seymour Pierce analyst Kate Calvert pointed out.
Elsewhere, Imperial Tobacco was 34p better off at 2,331p – but with gains of 1.5 per cent, it failed to overtake rival British American Tobacco, up 49.5p at 2,943p, after Goldman turned its attention to the sector. The broker said Imperial was likely to lag behind BAT in terms of growth, as it was "structurally less well-positioned", with 67 per cent of its earnings before interest and tax generated in the EU. "It will be difficult... for the group to deliver comparable earnings growth to BAT," Goldman analysts warned.
The broker also struck a cautious note on the Imperial valuation, lowering the stock to "sell" while pushing BAT as a "buy". "While we remain positive on tobacco owing to its cash-generative and stable growth profile, Imperial Tobacco's valuation appears stretched following below-average earnings growth in 2011," Goldman explained.
Further afield, the London Stock Exchange was out of favour after analysts expressed worries about its Italian clearing-house business. The stock was nearly 4 per cent or 33.5p behind at 830p after Goldman warned on the risks facing the division, which makes up for around 15 per cent of the LSE's revenues, according to the broker.
Although the income generated by the business has "grown fourfold in only 15 months", Goldman said the recent rise in spreads on Italian credit default swaps had "led to the imposition of collateral haircuts" at the clearing house. This, it explained, has pushed up the cost of Italian repos, or repurchase agreements, and made the ECB's facility comparatively more competitive. Eyeing this, the broker lowered its estimates for the group and, as a result, switched its stance on LSE's shares to "sell".
Premier Foods remained volatile. First, there was last week's rally, with short covering driving strong gains after the company announced an agreement to defer a forthcoming covenant test.
Then, on Monday, there was the intra-day slump as the impact of short covering wore off (and UBS turned bearish). And yesterday, the food producer's share price retreated by another 15 per cent or 0.86p to 4.88p, with part of the reversal being attributed to news that Premier had had to recall a batch of its Loyd Grossman korma curry sauce after one jar was found to be contaminated with bacteria that can cause botulism poisoning.
Shore Capital said it hoped the problem, which first emerged at the weekend, could be contained. "Our caution on Premier Foods' stock reflects concerns about the group's balance sheet going back many years, concerns that predominate to this day," the broker said, repeating its "sell" view. "We hope that this outbreak is contained and nothing more than a short storm in a teacup; however, we do need to make sure that it remains no more."
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