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FTSE rallies 1 on strength in commodity shares

Article By: ,  Financial Analyst
January 18, 2011 4:15 PM

Strong buyer demand for shares of commodity companies such as energy and mining firms, aligned with hopes for an outperforming earnings season, helped to power the FTSE higher by over 1%, with the UK Index settling around the 6050 level.

Indices across Europe saw similar gains with the DAX, CAC and IBEX all posting strong gains of between 0.7% and 2.7%.

Today’s gains are as much about investors bargain hunting stocks in the UK that had suffered three days of falls as investors becoming more optimistic about company earnings. We have had Burberry report excellent earnings along with positive reports from Rio Tinto, whilst business sentiment in Germany leaped far beyond market expectations. In short, it’s been a good news day and investors have lapped it up by buying into risky asset classes such as mining and energy firms. It will be very interesting to see whether Apple and IBM, who report later tonight, also cheer the market. We still have the key banks in Europe to report yet and so there is likely to be more volatility to come from this earnings season.

The miners and energy firms have been the energy, excuse the pun, behind much of the gains today with both sectors rallying around 1.5% on the day. As these two sectors are key heavyweights on the FTSE 100, this is where we can locate much of the drive behind today’s rally in indices.

Burberry delighted the market by reporting a 27% rise in third-quarter revenue, above market consensus, triggering an upgrade in stance from Numis Securities. The broker advised its clients that Burberry’s high quality growth more than supports its upgraded rating of ‘add’ from ‘hold’ and expects the retailer to deliver 20% EPS growth over the next few years.

Rio Tinto, the heavyweight miner, also pleased investors today by reporting iron ore production at record levels for the fourth quarter. This will undoubtedly please shareholders that the firm is doing all it can to cash in on high commodity prices whilst demand remains strong from emerging economies such as China. We have also seen market speculators buy into shares of Rio rival BHP Billiton today on expectations that they will report similarly good production volumes on Thursday.

Whilst investors continue to maintain an eye on proceedings amongst EU finance ministers, it appears investors are beginning to digest the potential for there being no top-up to the ESFS with greater ease today.

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