Market Report: Crash warning causes miners to miss out on rally

Blue-chip mining stocks missed out on a rally by the wider market yesterday and to blame was Merrill Lynch, which warned investors that the current bull market in oil and metals was likely to end the way the tech boom did in 2000 - namely with a major crash.

Blue-chip mining stocks missed out on a rally by the wider market yesterday and to blame was Merrill Lynch, which warned investors that the current bull market in oil and metals was likely to end the way the tech boom did in 2000 - namely with a major crash.

The US broker argues that recent talk of a commodity "super cycle" is premature. Metals prices have largely been driven by record demand from the Chinese economy, which has been growing at 8 per cent per annum. But Merrill believes investors are wrong to assume it can continue to grow at this rate for many years to come. It warns that China relies heavily on US consumer spending which is likely to start to slow in the coming months if, as widely forecast, the Federal Reserve continues to raise interest rates.

Hence, Merrill warned that the resources sector bubble was in danger of bursting soon. Such talk left Antofagasta 24p lower at 1,219p, BHP Billiton 12p weaker at 707.5p, Xstrata down 13p to 995p and Rio Tinto off 14p at 1,647p.

The main proponents of the "super cycle" theory in the commodity sector are Citigroup and Goldman Sachs. In February, Citigroup suggested that metals were about to enjoy a bull run similar to that seen in the Seventies. Meanwhile, last month, Goldman Sachs came up with the idea that the price of oil could be about to experience a "super spike" which may see it reach $105 a barrel.

The wider FTSE 100 roared 46 points higher to 4,942.9 as investors welcomed a retreat in the oil price. Sentiment towards the pharmaceuticals sector received a boost from Pfizer which outlined plans to save up to $4bn (£2.1bn) in costs. Investors hope the move will prompt the likes of GlaxoSmithKline, up 26p to 1,227p, AstraZeneca, 65p better at 2,146p, and Shire Pharmaceuticals, 18.5p stronger at 620p, to follow suit. According to the logic, if Pfizer, the world's largest pharmaceuticals company, aims to reduce its cost base by up to 12 per cent, its rivals should be able to do the same without losing market share.

News of the joint bid for Allied Domecq, up 96p to 633p, from Pernod Ricard and Fortune Brands sent traders hunting for the next deal in the drinks sector. Scottish & Newcastle, 20p higher at 479.5p, was top of their lists. Just last week rumours circled the Square Mile that SABMiller, up 22p to 844p, is considering an offer for the brewer.

In fact, the move on Allied Domecq got traders excited about possible corporate action far beyond the drinks industry. Exel, which is said to be in the sights of Deutsche Post, rose 22.5p to 885.5p, while Rentokil Initial, long tipped as vulnerable to a private equity predator, improved 7.5p to 173.5p.

BG gave up 4.5p to 421.5p on speculation it is mulling the acquisition of First Calgary, 42.5p stronger at 787.5p. The AIM-listed Canadian group, which recently put itself up for sale, boasts extensive gas reserves in Algeria. At present First Calgary is worth about £1.7bn but this is unlikely to be an obstacle for BG. Only last week it raised £1bn from the sale of its interest in an oilfield in Kazakhstan. Others said to be eyeing First Calgary are Germany's E.ON and Repsol of Spain.

ARM Holdings dropped 1.5p to 101.75p after a profits warning from Virage Logic, a competitor of ARM's Artisan division. The US group said its second-quarter results would miss expectations. Virage, a provider of semiconductor design technology, complained that customers were delaying their purchasing decisions. Nevertheless, the wider London-listed chip sector enjoyed a good day. Wolfson Microelectronics gained 4p to 156.5p while CSR improved 17p to 352p.

EMI added 6.75p to 244.25p after Deutsche Bank slapped a "buy" recommendation on the music group and a 310p price target. The German broker takes the view that the music industry's transformation to digital is opening up new revenue streams for EMI which should underpin growth at the company for years to come. Avis Europe, 4p better at 70p, registered a strong rise on heavy volume for the second session in a row, sparking rumours of a possible offer for the car rentals group.

Carpetright dropped 27p to 943p after Panmure Gordon cut back its profit forecasts by 6 per cent, blaming the poor retail environment in the UK and increasing pressures on consumer spending. The broker also reduced its price target on the stock to 950p from 1,050p.

Finally, punters should keep an eye on Omega Underwriting today. The Lloyd's of London insurer is expected to float, having raised £20m at 115p. Brokers tip Omega to enjoy a solid maiden session on the Exchange.