Market Report: Rio soars as the Footsie rebounds on euro bailout

Rio Tinto joined in as the stock market, relieved by European moves to ease the crisis in Greece, mounted a comeback last night. The miner, which was 7.7 per cent, or 240p, stronger at 3,367.5p, was driven higher as the bulls moved in to capitalise on recent losses. Besides being supported by the general shift in sentiment, Rio thrived on positive broker comment, with Credit Suisse suggesting that the market may have been overly bearish on mining equities.

In terms of valuation, the sector is trading on price to prospective earnings multiple of less than nine times, or below 7.5 times, on spot commodity prices, compared to an average of 12 times in the past. Indeed, on the broker's numbers, large-cap miners would only return to average multiples if spot earnings slide by around 40 per cent, something which would be equivalent to a further 20 per cent fall in base metals prices and a 50 per cent fall in bulk prices.

"Seasonal slowdown, debt crisis, China tightening and a new 'super tax' [in Australia]. All converge to bring the sector down 20 per cent from its [high in the year to date]," the broker said, supporting sentiment around the likes of Rio, Xstrata, up 83p at 1,092p, and Anglo American, up 250.5p at 2,752p. "Countering these concerns, we believe that global restocking [or the rebuilding of inventories] is still at an early stage, the super tax is now 'in the price' and China's economic momentum is on track despite a turbulent property market."

Overall, the FTSE 100 enjoyed one of its best sessions in the recent past, rallying by a heady 5.2 per cent, or 264.4 points, to 5,387.42, while the mid-cap FTSE 250 index added 5.4 per cent or 512.86 points to 10,004.75 as EU leaders unveiled a mammoth €750bn plan to defend the single currency and stave off the threat of a wave of a bankruptcies across southern Europe.

Banking sector shares were the strongest as fears of a wholesale devaluation of European sovereign debt faded, with the analysts at Goldman Sachs explaining that "whichever way one cuts it, a sovereign bond is the safest asset on a bank's balance sheet – doubting its value has a knock-on effect on all other assets".

Barclays led the way, vaulting to 329.6p, up 16.2 per cent or 45.9p, as relief about Europe offset an nervousness about the domestic political situation. Lloyds Banking Group and the Royal Bank of Scotland also gained ground, strengthening by 7.47p to 61p and by 6.25p to 51.75p respectively, while Standard Chartered swung to 1,755.5p, up nearly 12 per cent or 183.5p at the end of play. Similar moves were evident in the wider financials space, with the sudden spike in the market's appetite for risk driving Aviva to 339p, up 35.6p, and Legal & General to 8.2p, up almost 11 per cent or 83.8p.

For all its strength, the rally failed to lift BP, which fell by 4.7p to 549.2p amid uncertainty regarding solutions to the Gulf of Mexico oil spill, with the company saying the incident had cost it $350m so far.

Collins Stewart revised its target price for the stock to 615p from 650p, while Bank of America Merrill Lynch scaled back its target to 700p from 750p, saying that the setback in placing a containment dome over the main leak point opened the door to pricier solutions. "With BP now looking to turn to new options to contain the leak near-term, we would not be surprised to see the cost exceeding out prior expectations," Merrill said, adding that, after factoring in a potential increase in the daily cost to $15m, its full-year earnings estimates for the group fell by around 2.5 per cent.

The wider sector was firm, gaining ground as the oil price, responding to the European bailout plan, recovered from recent losses. BG, which said it was buying a 50 per cent stake in shale gas assets in Appalachia from Exco Resources, was 5.2 per cent, or 52.5p, ahead at 1,069.5p despite Collins Stewart trimming its target for the stock to 1,300p from 1,375p, while Royal Dutch Shell, whose target was raised to 2,300p from 2,150p by the same broker, added 56.5p to 1,889.5p.

Elsewhere, Brit Insurance, though 14p firmer at 777.5p, was among the weaker mid-cap stocks after Merrill lowered the Lloyd's of London insurer to "underperform" from "neutral", citing valuation grounds. "The shares have outperformed the wider European insurance sector by 15 per cent in the past month and 6 per cent in the year to date, leaving Brit's valuation relatively unappealing to us," the broker said, adding that while it didn't foresee a lot of downside in the stock, it did detect "better opportunities elsewhere" in the sector.

debenhams fared better, swinging to 70.6p, up 4.5p, after Investec, returning from an analyst trip to Copenhagen, where the company showed off the Magasin stores acquired last year, reiterated its "buy" view. The broker said the trip confirmed that Debenhams had "made a good-quality, earnings-enhancing acquisition".

"The experience with Magasin is likely to provide a platform for additional bolt-on acquisitions in northern Europe," Investec said, keeping its target unchanged at 92p. Panmure Gordon's views were also unchanged on the back of the trip, with the broker repeating its "hold" rating last night.