Market Report: Vale turns $30bn spotlight on Anglo American

Potential interest from Vale, the Brazilian miner which tried to take over Xstrata earlier this year, turned the spotlight on Anglo American yesterday.

A report in the Brazilian press, which suggested that Vale was close to raising $30bn (£15.4bn) to fund an acquisition, sparked speculation that Anglo may be a target for its South American peer. The two companies have been linked before – soon after it failed to acquire Xstrata, Vale was said to be eyeing the South African group – but, despite the market's reception, analysts remained sceptical about the rumour. Instead, they pointed back to Xstrata, noting that the talks broke down on valuation grounds. "They [Xstrata and Vale] left the table on relatively good terms," said one analyst, who added that if Vale can raise the money, it would first attempt to restart talks with Xstrata before moving on to other targets.

The rumours took Anglo American to an intra-day high of 3,376p. By the close, Anglo eased to 3,295p, down 3p. Xstrata was down 99p at 4,123p.

Elsewhere, a surprising turn of events took the Eurasian Natural Resources Corporation (ENRC), which gained 38p to 1,363p, to second place on the FTSE 100. Kazakhmys, which was pegged to sell its 14.59 per cent stake in ENRC, revealed plans to take its holding in ENRC up to 22.24 per cent. The company said it was would acquire the additional shares from the government of Kazakhstan. In return, it will issue new shares to the Government, which will eventually own 15 per cent of Kazakhmys' enlarged share capital. By the close, Kazakhmys was up 37p, at 1,664p.

Reacting to the news, Merrill Lynch said the transaction was positive for both companies. "For ENRC, the overhang of Kazakhmys' stake potentially coming into the market is removed and the company may end up being taken over," the broker said. "For Kazakhmys, it appears to have been anointed the national champion with the government taking a stake."

Overall, the FTSE 100 was down 50.3 points at 5,827.3. Concern about rising inflation, and its impact on interest rates, bore on investor sentiment. Early losses on Wall Street, where investors were similarly worried, also contributed to London's slide. The FTSE 250 was also down and lost 114.8 points to close at 9,629.5p.

Economic uncertainty weighed on the banking sector and Alliance & Leicester, whose relegation from the benchmark index is expected to be confirmed today, was down 4.53 per cent or 16.5p at 348p. HBOS lost 15p to 292p, Lloyds TSB was down 5.25p at 351.5 and the Royal Bank of Scotland lost 0.5p to 233.25p.

On the FTSE 250, Barratt Developments slumped by 24.22 per cent, or 29.25p, after rumours that investment banks were refusing to underwrite an emergency rights issue.

The slide in the shares prompted Dresdner Kleinwort, which told clients to keep away from the stock until the financial picture becomes clear, to withdraw its 199p target price. "We believe even at these levels existing shareholders should cut their losses and no one should consider buying until details of writedowns, gearing and any financial restructuring become clear," the broker said, adding: "We believe the true picture of Barratt's debt may be much worse than the market anticipates and the level of new funding needed may be more like £1bn than the £500m mooted by a number of commentators."

The remainder of the housing sector was also depressed. Beside the concern surrounding Barratt, sentiment was sullied by a new report from the Royal Institution of Chartered Surveyors, which revealed that the average number of transaction per surveyor over the past three months fell to 17.4, the lowest figure since 1978.

Redrow, which was struck by a "sell" note from Goldman Sachs, lost 16.2 per cent, or 32p, to 165.5p. "Given the market's aversion to housebuilders with high gearing, we expect Redrow to underperform in the current environment. In addition to strong operational gearing to an accelerating housing downturn, it is the most highly geared house builder on our estimates," the broker said.

Taylor Wimpey was down 15.58 per cent, or 12p, at 65p, Bovis Homes lost 7.54 per cent, or 28p, to 343.5p and Bellway was down 6.46 per cent, or 35p, at 506.5p.

On the upside, Drax, which operates Britain's largest coal-fired power plant, swung to the top of the FTSE 350, gaining more than 6 per cent, or 43p, to 750p. The company was buoyed by two factors: investors were cheered by the prospect of the company's promotion to the FTSE 100, which is expected to be confirmed today; and, second, market rumours suggested bid interest from British-gas's owner, Centrica, which was down 2p at 296.25p.

On AIM, the independent oil & gas explorer and producer Afren Energy gained 5p to 173p after pumping first oil from its offshore Okoro Setu Project in shallow water, in Nigeria.