Market Report: Bullish broker sentiment lifts Xstrata

A round of upgrades boosted Xstrata, the Anglo-Swiss miner, which firmed up by 11p to 654.5p last night.

Morgan Stanley moved the stock to "overweight" from "equal-weight", while Citigroup moved its recommendation to "buy". Citi said the stock was well placed to make the most out of an economic recovery, as the company's exposure to base metals gives it "significant leverage to improving macro conditions".

"Base metals will take the lead into an economic recovery, providing Xstrata with superior earnings momentum," Citi said. "The company's cost base is also improving in nickel and zinc, providing additional margin expansion potential."

The broker also weighed in on recent talk of a possible combination with Anglo American, which was 2.1 per cent or 33p heavier last night, saying that a tie-up was a "possibility rather than a probability".

"Debt levels and political sensitivities in South Africa make a hostile deal unlikely. A merger-type deal would limit the level of cost savings," Citi said, adding that "Anglo's reluctance to do a deal and the stark difference in corporate cultures" also weighed against the suggestion.

Overall, the market remained quiet, with the FTSE 100 closing broadly unchanged at 4,280.86, up 2.4 points, and the FTSE 250 relaxing to 7,241.67, down 67.38 points. The benchmark is still in bull market territory, but only by a small margin – at last night's close it was around 22 per cent above the March low.

Traders attempting to gauge the future direction of equity markets highlighted a new Deutsche Bank circular, which was doing the rounds of the City yesterday. "Our longer term conclusion is that it is unlikely that equity markets have seen their lows in this secular bear market," the Deutsche strategist Jim Reid said. "History would need to be rewritten if the biggest equity bubble in history (peaking in 2000) ends with valuations at just below the long-term fair-value levels they reached in March."

To the disappointment of some traders, he added, "history tells us that at some point in the next decade there will be much more stressed valuations than today and a once-in-a-generation buying opportunity in equities. We fear that we are still some way off this point."

Back with the day's movements, and BAE Systems rose to 344.5p, up 2.5 per cent or 8.5p, amid reports that Saudi Arabia may order additional Eurofighter Typhoon jets. Traders said that, if true, the reports bode well for BAE, which is part of the Eurofighter consortium.

Elsewhere, Barclays eased to 268.75p, down 1.25p, as analysts weighed up a recent Barclays Capital investor seminar in New York. Nomura, which maintains a "buy" stance on Barclays shares, said the presentation suggested "confidence that the first-quarter performance from the division is not a one-off", adding: "We regard this as the principal driver of shares in the short term".

The wider sector was mixed, with Royal Bank of Scotland gaining 1p to 38p, Lloyds climbing to 69.3p, up 2.2p, and Standard Chartered firming up by 30p to 1,181p, but HSBC easing to 523.5p, down 3p.

Also on the FTSE 100, Reed Elsevier retreated to 464p, down a penny, after Morgan Stanley weighed in, downgrading the stock to "equal-weight" from "overweight" on account of "limited prospects of a short-to-medium term retreating as it lacks the early cyclicality that the market has recently preferred". The broker added: "Rather, Reed's purpose is to be a blue-chip professional publisher with solid defensive qualities."

On the second tier, ITV, 0.25p firmer at 35.75p, was in focus as another broker highlighted the potential for a rebound in the broadcaster's share price. Forecasting an advertising recovery in 2011, Royal Bank of Scotland analysts said they expected TV to lead the charge out of the slump, "and ITV, as the largest incumbent broadcaster, to take the lion's share of returning advertising demand given its compelling strategic proposition".

"Corporate activity remains on the agenda with potential asset disposals, break-up or full acquisition offering a hedge," they added, upgrading ITV to "buy" from "sell", with a revised 41p target price, compared with 19p previously.

Mouchel, the consulting and business services group, was the worst-performing mid-cap stock, retreating to 157.5p, down almost 33 per cent or 76.2p, after the company said that performance for the current year will be below its previous expectations. In response, KBC Peel Hunt moved the stock to "sell" from "hold", saying that the warning "will surprise some investors who had seen the stock as a 'safe haven'".

"Ahead of a more detailed conversation, we anticipate moving [profit estimates for the 2009 full year] from £48m pre-tax to £40.8m (25.8p of earnings)," the broker added.

On the upside, Dana Petroleum, the independent oil & gas exploration and production company, strengthened by 6.3 per cent or 78p to 1,322p amid vague speculation – played down by traders – regarding a possible 1,800p-per-share bid.