Market Report: Xstrata is tipped to show its mettle in 2006

Xstrata kicked off the new year by registering a 4.4 per cent rise, up 60p to 1,420p, after Dresdner Kleinwort Wasserstein tipped the mining group as likely to be a top performer in 2006. The broker is convinced that a mixture of share buy-backs and merger and acquisition activity will drive the group's stock sharply higher in the coming months.

Xstrata is a major beneficiary from booming copper and coal prices and Dresdner predicts that the value of both commodities are unlikely to lose ground this year. In fact, the two metals account for 70 per cent of earnings at the mining group. On copper, in particular, the broker sees very little downside given the tiny stockpiles of the metal and strong demand for it. Investors should not be surprised by upgrades to Xstrata forecasts, according to Dresdner.

On top of the impressive growth the group offers, there is also the possibility of M&A activity. Dresdner believes there is a good chance Xstrata will table a counter bid for the Canadian nickel player Falconbridge. It already controls 20 per cent of the company, which is in the process of being bought by Inco, the world's second biggest nickel miner. Should Xstrata decide against making a move on Falconbridge, there is still the possibility that it will make a handsome profit on its stake in the group by forcing Inco into raising its offer. It can do this by simply not tendering its shares.

Elsewhere in the sector, Kazakhmys jumped 35.5p to 809p, Anglo American improved 61p to 2,040p, Rio Tinto added 48p to 2,703p and Antofagasta improved 42p to 1,911p. The price of oil shot $2 higher to just over $63 amid worries that the row between Russia and Ukraine over natural gas prices could undermine fuel supplies into Europe. Hence, dealers were not surprised to see BP gain 18p to 637p, BG Group add 20p to 594.5p, Royal Dutch Shell improve 59p to 1,917p and Cairn Energy rise 37p to 1,957p.

This strong performance by the mining and oil sectors, which account for about a quarter of the FTSE 100, pushed the blue-chip index to its highest level since July 2001, up 62 points to 5,681. The FTSE 250 rose 99 to 8,893.

WPP put on 8.5p to 637.5p after Lehman Brothers upgraded its stance on the advertising giant to "overweight" from "equal weight". The broker said: "WPP's franchises are fundamentally strong and we expect it to continue to see better new business after its blip this year." Lehman is particularly excited about the group's exposure to fast-growing parts of the world. WPP added to these yesterday via an acquisition in Poland.

Meanwhile, Lehman undermined EMI, off 4.5p to 238p, after cutting its rating on the music group to "underweight" from "overweight". The broker warned that sales from digital downloads are unlikely to meet market expectation. Lehman is the second broker to alert the City of this in a week. Last Thursday, SG Securities urged its clients to exit the stock for the same reason.

The retail sector had a bad day across the board. Woolworths was the worst performer, losing 1.5p to 37.25p in heavy trading. JJB Sports fell 6.25p to 169.5p, Halfords lost 8p to 347p, WH Smith retreated 7.5p to 427p, Marks & Spencer gave up 8p to 497p and Kingfisher dropped 2.75p to 234.5p. Seymour Pierce argued that JJB, Woolworths and Matalan are likely to be among the biggest losers this Christmas. Overall, the broker believes the pre and post-Christmas period has probably been a bit worse than the previous year.

Soco International added 29p to 815p after a bullish update from the oil explorer's operations in Yemen.

In the world of smaller companies, Global Oceanic Carriers, the Greek shipping group, ticked 3p higher to 46.5p amid vague whispers of a bid. Since Global Oceanic's 140p-a-share float earlier this year, the stock has been a disaster. To blame is the downturn in the shipping industry since the summer, which forced the company into cancelling an order for a new ship.

Metals Exploration rose 1p to 34.5p on hope the group will soon unveil a bullish drilling statement. Bid rumours drove Autologic 18p higher to 117.5p. Gossips reckon a 145p-a-share offer could be just around the corner. CardPoint gained 8.75p to 81.5p after Mark Mills, the chief executive of the cash machines firm, bought 130,000 shares at 77p. Director buying also supported CMS WebView, 0.25p better at 2.75p. Keppel Simpson, the software group's chairman, bought 195,000 shares at 2.5p.

Landround was unchanged at 88.5p despite news that Fidelity International had raised its stake in the promotions company. Finally, China Real Estate Opportunities soared 124 per cent, or 260.5p, to 470.5p. The group aims to buy land for development in China and floated at the end of last month at 140p.