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Even allowing for a spot of profit-taking today, mining shares remain at the top of most investors' shopping lists with a little help from top broker Goldman Sachs. The gold price also touched record highs.
Goldman is still bullish about the outlook for commodity prices, which is good news for those companies digging the stuff out of the ground. It says expectations of strong steel production growth, driven by recovering western economies and strong Chinese production growth means we will see raw materials prices grow over the next 12 months.
As a result, Goldman has increased its April 2010 coking coal benchmark settlement from $155 a tonne to $180 a tonne.
All this is taking place against the backdrop of a sharp drop in the dollar in which commodities are priced. Dealers say a softer dollar is likely to leave a dent in the miners' profits. But despite this investors are continuing to chase mining shares higher. They, along with the banks, have been the driving force in the London stock market's revival in recent months. The gold price briefly touched $1048 an ounce as investors continued to hedge against that weakened dollar. Barclays is forecasting the price could soon reach $1500.
Lonmin touched 1640p before slamming into reverse with a fall of 57p at 1553p. Randgold Resources added 8p to 4540p, and Kazakhmys 6p at 1099p, while Rio Tinto slipped 11p to 2730½p. Investec has also added to the mix and tells clients that any near-term weakness is a buying opportunity. Top of its shopping list are Anglo American, down 23p at 2079p, and Rio Tinto. Dealers say there is too much cash chasing too few shares and that is serving to drive prices higher.
Kazakhmys remains on Goldman's influential conviction buy list, while Impala Platinum is deemed to be the most expensive stock in the sector.
Shares generally ran into light profit-taking after the strong gains of the past couple of days. Even so the losses were restricted, as witnessed by the FTSE 100, which fell just 19.8 points to 5118.2.
But Standard Chartered warns: “Despite increased optimism that an economic recovery is taking hold, it sees a growing risk that the US recovery will look like a flash of lightning.”
Even in Asia, where the recovery is stronger, sustainability is still undermined by weak loan demand and poor infrastructure in many economies.
Citigroup has raised its price target on Whitbread, the Premier Inn hotels and Costa Coffee chain, from 1250p to 1400p and has moved its recommendation from hold to buy. The shares reacted to the move with a loss of 17p at 1206p. The broker has also jacked up its target on rival Intercontinental Hotels, 25½p higher at 824½p, from 550p to 970p and raised its rating from hold to buy.
Cazenove is also a fan of ICG. It has repeated its outperform rating on the shares and says they look cheap compared with the ratings of American peers Starwood and Marriot.
HSBC reckons that in the normal course of events the water utilities might have been forced to cut their dividends in order to counter the tough new pricing formula which will be published by the industry regulator Ofwat next month.
Worst affected could be United Utilities, up 2.8p at 454.1p, and Severn Trent, 19p higher at 972½p, although HSBC is convinced they have scope to gear up to avoid dividend cuts, even though it may affect their credit ratings. But signs of recovery in the Retail Price Index are likely to increase revenues and dividends for the current year to 31 March 2010.
Shares in the water companies have suffered since Ofwat published its draft prices with investors also choosing to take more risk by switching out of defensive stocks. But HSBC is convinced a more favourable final determination from Ofwat may underpin their yield investment proposition.
The half-year trading update from J Sainsbury received a cool reception from the City and the shares responded with a fall of 8½p at 314½p. The sales figures lived up to expectations but the grocer warned that growth would slow in the second half along with food price inflation. Oriel securities appeared unperturbed and has repeated its buy rating. Rival Tesco, which reported yesterday, ran into profit-taking leaving the shares 4.4p down at 386.4p.
