Market Report: Xstrata is a cut above as rates head down

Xstrata surged by more than 25 per cent last night after rising metals prices and a shift in sentiment in the London market sparked a round of short closing the mining sector.

Concerns about the global economic slowdown, and its impact on the consumption of commodities, took a back seat as traders focused on the prospect of a round of interest rate reductions. China and Norway obliged in the afternoon, while the US Federal Reserve was pegged to confirm a reduction in American base rates after London closed. The Fed duly cut rates by half a percentage point to 1 per cent. The Bank of England and the European Central Bank are expected to follow suit next week.

The expectations lured investors, who made a beeline for those stocks that have been hit the hardest in recent weeks. The mining sector, which has traded lower amid increasing signs of a dip in demand for commodities, was among the leading beneficiaries after metals prices picked up as the equity market rally gather pace. Xstrata was the strongest out of the sector heavyweights, ending the session at fourth place on the FTSE 100 leaderboard, up 178p at 887p. Traders said the stock, which has been among the worst hit in recent weeks owing to fears that shareholder Glencore might offload part of its 34 per cent stake owing to widening credit derivative spreads, was pusher higher than its peers because some short sellers had been forced to abandon their downside bets. Supportive comments from Liberum Capital, which said fears over Glencore's liquidity were "misguided", were also cited as a factor behind the Anglo-Swiss miner's performance.

In the wider sector, Anglo American was up 20.9 per cent or 238p at 1,379p, Fresnillo climbed 9.1 per cent or 20.2p to 125.8p, and Rio Tinto was up 18.6 per cent or 419p at 2,677p.

Overall, the outlook for interest rates sparked a market-wide rally and FTSE 100 advanced by 8 per cent or 316.16 points to 4,242.54, while the FTSE 250 was up 5 per cent or 289.85 points at 5989.11.

Financials were strong and, in the insurance sector, Old Mutual, sold on Tuesday after JP Morgan said the company may need to raise capital, gained 30.3 per cent or 11.8p to 50.8p, while peer Aviva was up 25.1 per cent or 65p at 324p. Friends Provident, which gained almost 30 per cent in Tuesday's closing auction, fell back, losing 7.7 per cent or 5p to 60p, as investors banked profits.

In the banking sector, Standard Chartered rose to 910p, up 30 per cent or 210p, after house broker UBS, reassured by this week's interim management statement, moved the stock to "buy"", saying that the bank can "comfortably defend its 6 per cent core equity tier 1 [ratio]".

The improved sentiment among investors also helped Royal Bank of Scotland, which gained 12.7 per cent or 7.2p to 64p despite unhelpful comment from Cazenove, which highlighted the pros-pect of greater loan impairment and the possibility of a year-end capital ratio of between 7-7.5 per cent rather than its current post equity injection estimate of 8.1 per cent.

There was interest in HBOS, up 28.3 per cent or 19.4p at 88p, after the lender took advantage of the UK government guarantee to raise money in the bond market.

Oil issues were firm after crude prices bounced back from a 17-month low and Royal Dutch Shell, which said that chief financial director Peter Voser will succeed Jeroen van der Veer as chief executive next year, gained 11.6 per cent or 177p to 1705p. BG, up 13.0 per cent or 92.5p at 803p, was stronger after supportive comment from UBS, which said supply from the Queensland Gas acquisition will be "complimentary to BG's existing supply portfolio".

The broker added: "In a bear market, growth and exploration have fallen out of fashion somewhat, yet we believe BG shares are materially undervalued."

On the second tier, the prospect of interest rate reductions triggered a bear squeeze, which sent Persimmon to 251p, up 17.0 per cent or 36.5p. The same factors drove pubs group Enterprise Inns to 95.5p, up 22.8 per cent or 17.75p, and retailer Debenhams to 31.75p, up 22.1 per cent or 5.75p.

On the downside, Ferrexpo was the weakest on the mid-cap index, down 25.5 per cent at 39.5p, after warning on sales. The company also announced a change at the helm, with Kostyantin Zhevago taking over as chief executive from Mike Oppenheimer.

Among smaller companies, the Chinese environmental engineer Tinci Holdings slumped, losing 67.7 per cent or 10.5p to 5p, after the company said that a number of desulphurisation proceeds had been postponed or withdrawn due to power stations deferring capital expenditure, leaving it with fewer projects to bid for and hitting second-half profits. Full-year profit for 2008 is expected to be similar to the profit for the six months to the end of June.