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Mining stocks drive FTSE 100 rebound – for now

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The FTSE is showing all sectors in the green. Glencore is the highest riser and basic resource stocks are in demand despite the volatility in China overnight – the Shanghai Composite closed lower by 2.55 per cent. Perhaps the fact that the losses remain in single digits is considered good news these days?

Indices closer to home have added an average of one per cent. The Dax, still in death cross mode, has bounced higher – but it is notable that it is the utilities sector that is leading the gainers, followed closely by the materials sector.

News from the National Bureau of Statistics said China’s economy actually grew 7.3 per cent in 2014, down from 7.4 per cent. Naturally, these figures can be taken with a large pinch of salt, but the market seems to be liking it.

With Chinese FX reserves falling to two year lows, it’s hardly a disaster. The war chest still has some $3.56tn (£2.33tn) left albeit lower than forecast. We can likely expect to see further reductions in reserve requirements in the near term which may in turn help prop up the stock market there.

The recent sell off in European markets has created some pockets of value in certain stocks and this has been recognised with a host of broker upgrades aiding risk sentiment. Glencore has temporarily reversed its mantel from the FTSE dog to the FTSE darling by rising as much as 12 per cent in early trade.

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A stock that falls 60 per cent year to date has to find a floor some time, and clearly the time was ripe for management to actually address the problems. Some issues, such as the decline in copper prices are to come extent outside the control of the company, but any measures that might shore up some confidence in what was beginning to look like a penny stock are clearly welcome. 

Dividend cuts, asset selling and a new debt reduction plan appear to be doing the trick and have inspired some broker upgrades. Cutting production at some of its copper mines is also underpinning other mining stocks, as a tighter copper market might well bring about a floor.

Supply is one issue, but Glencore and other basic resource companies can do little about faltering demand.

Nevertheless, other mining stocks are enjoying the tail wind from the surge in Glencore’s share price: Antofagasta (+6.8 per cent),  Fresnillo (+2.43 per cent), and BHP Billiton (-2.03 per cent).

Pearson is also on the rise and benefitting from several broker upgrades. Shares in the company have declined eight per cent year to date, but the average price target now implies 22 per cent upside.

The strength of the pound will likely be a recurring theme in next quarter earnings releases. Associated British Foods have given us a taster in its trading update. The company expects a modest decline in full year operating profit as cooler weather and the stronger pound impacts sales and margins. The stock fell 2.3 per cent in early trade.

Brenda Kelly is head analyst at London Capital Group.

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