Market Report: Weaker sterling gives strength to ARM

The semiconductors group Arm received a boost last night as traders eyed the benefits of the recent weakness in the pound.

The stock firmed up by 2.7p to 225.1p after Goldman Sachs upped its estimates on account of the pressure on sterling. The prospect of a hung parliament has rattled the forex markets, with the pound declining sharply against the US dollar since the beginning of last month. And though this is worrying for some, it bodes well for ARM, the vast majority of whose revenues are dollar denominated, compared to a 50-50 dollar-sterling split in costs, according to Goldman.

"Sterling has continued to fall sharply and has depreciated [by around] 6 per cent against the US dollar since the beginning of February, when we last adjusted our ARM forecasts post the fourth-quarter earnings," the broker said, raising its target price to 230p. "Perhaps this was due to the narrowing in the YouGov and ComRes opinion polls, which provoked a growing perception that the coming UK general election may result in a hung parliament and more uncertainty on fiscal consolidation."

Overall, the FTSE 100 was broadly unchanged, easing by 6.05 points to 5527.16. The FTSE 250 added 53.12 points to 9665.29 after the Bank of England left interest rates and the parameters of its quantitative easing programme unchanged.

Softer commodity markets took the shine off the mining sector, which fell back as traders sought to bank recent gains. Fresnillo, for instance, fell by 27p to 812.5p, while Randgold Resources lost 110p to 5085p and the Eurasian Natural Resources Corporation slipped to 1089p, down 21p.

Barclays, up 3.2p at 333.1p, was in focus in the banking sector after the China Development Bank, which owns around 2 per cent of the group, was reported to have said it will review its ties with the British lender. Standard Chartered, up 26.5p at 1700.5p, drew steam from a round of supportive broker comment, with the likes of UBS, JP Morgan and Morgan Stanley raising their target prices on the back of the recently published annual results. The Royal Bank of Scotland and Lloyds were also strong, adding 1.44p to 39.36p, and 1.11p to 53.89p respectively, while HSBC fell back, easing by 6.5p to 693.4p.

Elsewhere, Home Retail Group, down 2.4p at 256.8p, was held back after Bank of America Merrill Lynch, while sticking to its "buy" stance, scaled back its target for the stock to 310p. Weighing in ahead of the company's end-of-year trading statement next week, the broker said the snow in January is likely to have affected the sales performance at Argos and Homebase, though "both businesses should have seen some catch-up in February". Separately, the stock was the subject of some vague deal speculation, with rumours of possible disposals doing the rounds.

In the oil and gas space, weaker commodity markets weighed on BG, which fell by 14p to 1171p, despite some words of support from analysts at the Royal Bank of Scotland. "The [BG] investment case continues to combine strong volume growth prospects, good cost performance, high exposure to a major LNG [liquefied natural gas] business and persistent takeover speculation," the broker said, raising its target price for the stock to 1400p, from 1340p, to reflect raised estimates for oil and gas production and LNG profitability in the medium term. In the wider sector, Royal Dutch Shell was 8p behind at 1863p.

Further afield, the silicon wafer manufacturer PV Crystalox Solar gained more than 3 per cent, or 1.5p, to 51.35p after Jefferies turned positive, upping the stock to "buy" from "hold" on account of what it termed an "attractive" valuation. "PV has long been one of our preferred franchises in the solar industry, although the previously dismal outlook on wafer pricing had suggested the share price was likely to come under pressure," the broker said, keeping its target price for the stock unchanged at 76p, but lowering its 2010 wafer average selling price (ASP), forecast by 8 per cent. "However, we believe the market may have overshot and that, even with our reduced wafer ASP forecast, PV appears attractive."

On the downside, Mouchel fell by more than 5 per cent, or 12p, to 201p after VT, up 9.5p at 685p, said it would not be making a bid for the company. Separately, VT and Babcock International, down 17p at 518p, said they had agreed to enter deal talks. Responding to the day's developments, Altium switched its stance on Mouchel to "sell", with a revised 190p target price, while Panmure Gordon reiterated its "buy" view on VT.

"After failing to have a dialogue with Mouchel management team prior to its takeover panel deadline [of March 8], it now looks like this approach will be dropped for at least another six months," Panmure said, sticking to its 775p target price for VT's shares. "On the other front, it looks like the ball is firmly in Babcock's court as they have until 12 April to make a firm bid for the company.... It does not appear as though a dialogue has taken place here either, with Babcock now in a position where it probably has to improve upon 715p-per-share to see the books."