Market Report: Fears of softer metals prices weigh on miners

Blue chips continued to slide last night, with the mining sector bearing the brunt of the sell-off amid worries about further softening in metals prices.

Rio Tinto, Kazakhmys, Xstrata and Vedanta Resources were among the losers as investors rushed to secure profits. Worries that other countries may move to copy Australia's planned tax on mining profits, along with bearish commentary from Bank of America Merrill Lynch, hastened the slide, with the broker warning that the combination of Europe's sovereign debt woes and worries about a slowdown in Chinese demand could conspire to pressure commodity prices. This in turn could dampen the mood around mining equities, which may struggle to rise despite trading on affordable valuation multiples.

"Near term, things do look tough for the miners," Merrill said. "Recent measures announced by the Chinese authorities to cool the property sector are expected to lead to a slowdown in construction activity, which would weigh on metals demand – spot iron in particular is coming off its peak... On a medium-term view, we see value emerging in shares and would take another look at the sector as the euro crisis subsides and as we get more clarity on Chinese policies."

The broker went on to downgrade Rio and Xstrata to "neutral" from "buy", aiding their decline to 2,812p, down 172.5p, and to 893.2p, down 40.5p, respectively. Kazakhmys and Vedanta, both of whom were lowered to "underperform", fell by 49p to 1,089p and by 82p to 2,119p last night. Merrill's preferred plays were also held back as the sell off unsettled sentiment across the benchmark index, with Anglo American, which the broker recommends for its exposure to precious metals, falling to 2,416p, down 79p at the end of business.

Overall, the FTSE 100 attempted a recovery in the early hours of trading, but the strength faded as the session progressed with the index striking a low of 5000.76 in the afternoon. Fears of onerous regulatory moves supplement concern about divisions within the euro area, pushing the benchmark, which was also hit by the read across from sharp losses on Wall Street, to 5,073.13, down 1.7 per cent or 84.95 points, at the close. The FTSE 250 index was also under pressure, slipping to 9,433.59, down 237 points, as the bulls went into hiding.

At current levels, the FTSE 100 is within striking distance of the February closing low of 5033. Taken from the recent mid-April peak of above 5,800, the index is down nearly 13 per cent, while it is down nearly 10 per cent since the beginning of this month. Despite the falls, last year's rally means that the blue chips remain well clear of the lows seen during the worst of the credit crisis, with the FTSE 100 still up more than 40 per cent since March 2009.

Such was the weakness in sentiment last night that even gold, the traditional hedge against the threat of economic stress, fell prey to the sell off. Randgold Resources ended 1.7 per cent or 95p behind at 5,640p as gold prices softened, with traders highlighting rumours of funds liquidating positions in the yellow metal. The Mexican silver producer Fresnillo was also caught by the downdraft, losing 26.5p to close at 815p.

Financial sector stocks, which tend to trade lower as the market loses its appetite for risk, made gains in the early part of the session, climbing as bargain hunters moved in. The bears returned in the afternoon, however, and at the close Barclays was 2.2p lower at 288p, while HSBC was 6.1p behind at 632p and Royal Bank of Scotland lost 0.38p to 44.82p.

The pharmaceutical giant GlaxoSmithKline was 11.5p weaker at 1,166p after a German court ruled that a key patent on the company's Advair lung drug was not valid. Other defensives were also under pressure, with AstraZeneca losing 46.5p to 2,856.5p and the cigarette maker British American Tobacco declining to 1,983p, down 24.5p. United Utilities was also marked down, shedding 8p to 526.5p.

Elsewhere, the semiconductors group ARM Holdings was 3.5p lower at 233.6p as brokers issued feedback from a recent analyst and investor outing. Royal Bank of Scotland, which stuck to its "hold" stance, said ARM was in "very confident mood", something which was confirmed by Citigroup, whose analysts repeated their "sell" view. Though terming ARM a "great business", Citi said it was unconvinced by the valuation. "We struggled... to find new evidence during the day that could drive a further re-rating in the shares," the broker added, pointing out that ARM had outperformed its peers by "47 per cent over the last 12 months".

Further afield, Great Portland Estates stood firm, adding 2p to 300p on the back of a well-received set of full year figures. Following on from recent updates from peers FTSE 100-listedpeers British Land and Land Securities, the real estate group posted a better than expected rise in net asset values, prompting Evolution Securities to switch its view to "add" from "neutral". Panmure Gordon also announced a change of heart, moving Great Portland to "hold" from "sell" on valuation grounds.