Market Report: Bargain hunters keep Anglo on firm footing

Parts of the mining sector stood firm last night, with bargain hunters helping Anglo American and Xstrata avoid another market sell-off.

Anglo was marked up by 19.5p to 2,477.5p, while Xstrata gained 5.9p to 924.9p as commodity markets steadied and Morgan Stanley urged investors to make the most of the recent pullback in sector share prices.

"Timing is difficult in this volatile sector and, while the stocks could admittedly get cheaper on short-term macro concerns, current levels already offer good buying opportunities across the sector, where we see an average 56 per cent upside potential," the broker said, naming Anglo American and Xstrata among its preferred investments.

Morgan Stanley also recommend Vedanta Resources and Kazakhmys, both of which fell along with the wider market, easing by 16p to 2,090p and by 15p to 1,059p respectively. In the wider sector, Randgold Resources continued to make the most of the appetite for safe-haven investments, gaining 135p to 6,090p as gold prices swung to a record high in US dollar terms.

The FTSE 100 touched a session low of 4,984.66 before recovering to 5,028.15 at the close, down 40.91 points. The mid-cap FTSE 250 index was also under pressure, sliding by 121.53 points to 9,356.17 points after the ratings agency Fitch warned on the UK's public finances. "The scale of the UK's fiscal challenge is formidable," the agency said, knocking the mood across the capital markets. Besides stocks, sterling fell against the dollar and the euro, and British gilt futures underperformed benchmark German Bunds as the agency's comments sparked concern.

Banking sector stocks continued to lose ground as investors fled riskier investments. State-backed peers Lloyds and Royal Bank of Scotland were the weakest, sliding by 2.2p to 51.76p and by 1.64p to 41.45p respectively, while Barclays lost 9.35p to 276.55p. Standard Chartered was also under pressure, closing 31p behind at 1,580p, but HSBC managed to overcome the downdraft, standing firm at 633p, up 3.6p.

Elsewhere, the owner of British Gas, Centrica, was 4.1p lower at 277.3p after Bank of America Merrill Lynch warned that while the company was set to grow earnings in the years ahead, this was already well known. "The stock is already a consensual 'buy'... and it is hard to foresee developments that would prompt a fresh wave of enthusiasm," the broker said, reinstating coverage on the stock with a "neutral" view.

Merrill also weighed in its on sector peer Scottish & Southern Energy, which was 12p behind at 1,062p after the broker switched its stance to "neutral" from "buy". "Although the dividend is now assured for the next three years, SSE has confirmed that it will no longer have a material equity stake in the vehicle currently bidding in the auction of EDF's UK electricity network assets," Merrill said. "This removes the threat of an imminent equity issue, but also dilutes what we viewed as a key catalyst for the shares in the short term."

Further afield, Punch Taverns fell by more than 7 per cent, or 4.6p, to 60.1p after HSBC issued a warning on the likely pace of recovery at the pubs group. The broker lowered the stock to "underweight", noting that it had yet to see "signs of trade stabilising" in either the leased or the managed pubs divisions.

"Punch's management have laid out clear and sensible proposals for turning around both the underperforming tenanted and managed business," HSBC said, scaling back its target for the stock to 60p from 120p. "However, we are concerned that since trading in both divisions continued to deteriorate as at the [time of the] first half results ... Punch could continue to disappoint the market."

Housing stocks took a hit, with Taylor Wimpey declining by 7 per cent amid fears of another housing market slowdown. The stock was marked down by 2.12p to 28.1p as traders, rattled by Fitch's warning on the UK's public finances, revisited the possibility of a double-dip recession and a renewed slide in the housing market. The worries follow two uninspiring house price reports, with the most recent figures from the Nationwide showing a slowdown in the pace of growth over May and those from the Halifax evidencing a decline.

In the wider sector, Persimmon and Bovis Homes fell by more than 5 per cent each, shedding 19.3p to 359.5p and 21.1p to 343.2p respectively. Barratt Developments was also down, losing 4.55p to 95.45p.

The transport group National Express was held back despite some words of support from Morgan Stanley, whose analysts, returning from briefings confirming that the company remained on track to meet their forecasts for 2010 and 2011, reiterated their "overweight" view. "Robust trading in Spain continues – National Express is not levered to federal government spending cuts and has seen little pressure to date where it is exposed to regional government funding," the broker said, adding that elsewhere, margins in the US school bus business were recovering and that closer to home, the turnaround in the UK business was "well under way".