Thursday, 16 September 2010

Market Report: Drax switched off as brokers lure the bears

A round of negative broker comment ensured a negative ending for Drax, the
power station operator which fell nearly 11 per cent at one point yesterday.

Goldman Sachs issued a warning on valuation, moving the stock to "neutral"
from "buy", while JP Morgan Cazenove, worried by the outlook for UK gas
prices, switched its stance to "underweight" from "neutral". JP Morgan said
that while the stock, which closed 15.7p lower at 398.2p, had outperformed
the European utilities index over the past three months, UK power prices for
winter 2011/12 had declined by nearly 10 per cent, giving grounds for
concern. "In our view, the risk to UK gas and hence power prices heading into the
winter is skewed to the downside," the broker said, pointing to factors such
as UK gas inventories, which "have rebounded from their March lows and are
now close to their three-year average". The outlook for UK
commercial gas is also clouded by
the pace of liquefied natural gas imports, which saw strong month-on-month
growth in August, and by the fact that 12-month forward prices are "now
trading at a 60 per cent premium to US prices", the highest level since
mid-2008, according to JP Morgan.

Overall, the benchmark turned lower, with falling commodity stocks driving
the FTSE 100 to 5,555.56, down 11.85 points. The mid-cap FTSE 250 index
fared better, adding 21.83 points to 10,494.27 by the close.

The miners were broadly under pressure, with softer commodity prices
weighing on sentiment. Metals eased on the back of a jump in the US dollar
after the Bank of Japan stepped into limit gains in the yen. Lonmin was
among the weakest, losing 31p to 1,669p, while Xstrata fell to 1,160p, down
10p, and Kazakhmys lost 8p to 1,355p. The Eurasian Natural Resources
Corporation, which was in focus as First Quantum Minerals sued the company
over claims relating to assets it recently bought in the Democratic Republic
of Congo, was also held back, shedding 18.5p to 866p.

African Barrick Gold, down 21p at 598p, fell to the bottom of the FTSE 100
as traders banked profits following a recent spike in the gold price. The
weakness came against the backdrop of some cautious commentary from the
billionaire investors George Soros, who said that while gold prices may
continue to rise, "it will be very interesting to see if there is a decline
in the next few weeks.... It's certainly not safe and it's not going to last

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