Rio Tinto and other mining giants dragged stocks in London lower on Monday, amid fears that commodity prices were near the top of a cycle and weakness in both iron and copper.
Rio Tinto /zigman2/quotes/208934945/delayed UK:RIO -2.20% stock, which was also downgraded by Swiss bank UBS /zigman2/quotes/206172872/composite UBS -0.68% on Monday, fell more than 3% before settling 0.3% lower, with shares in metals and mining giants Glencore /zigman2/quotes/201400686/delayed UK:GLEN -0.59% , Antofagasta /zigman2/quotes/200173667/delayed UK:ANTO -0.96% , and BHP /zigman2/quotes/208108397/composite BHP -4.50% initially declining before they reversed losses by the end of the day to move higher. The price of iron ore futures was down near 1%.
UBS downgraded Rio Tinto from neutral to sell with an unchanged target price of £51 ($70.7) per share, noting that the stock’s cash returns were attractive but the macro backdrop was deteriorating. The stock is currently trading above £57.
“In our view current [free cash flow] and dividends are not sustainable as we expect the iron ore price to fall by >50% … over 12-18 months; we do not believe [Rio Tinto’s] valuation is compelling at a ‘normalised’ iron ore price,” analysts at UBS said.
“Near-term risks for the commodity complex are increasing with the Fed turning more hawkish and China taking action to deflate commodities … we expect this to accelerate the unwinding of the ‘reflation trade,’” they added.
Read this on Barron’s : China Moves to Cool Commodities Rally. Mining Stocks Are Falling.
Rio Tinto’s stock slide and the rest of the miners added weight to the FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX -1.20% —the index of London’s top stocks by market capitalization—which lagged behind other key European indexes. The FTSE 100 rose 0.64%.
European equities initially opened lower, following weakness in Asian markets after indications of coming rate hikes from the U.S. Federal Reserve last week, but rebounded as the trading day got underway.
“Asian markets slumped heavily as investors continued to react to last week’s U.S. Federal Reserve meeting which has curdled sentiment by raising the prospect of earlier than expected rate rises,” said Russ Mould, an analyst at AJ Bell.
“The FTSE 100 notched up a far more modest fall, having already endured a fair bit of damage at the end of last week linked to concerns about rate rises,” Mould added.
Shares in Senior /zigman2/quotes/200980573/delayed UK:SNR -3.40% , a holding group for manufacturing and engineering companies, rose more than 9% after U.S. private equity group Lone Star Global said it raised its takeover offer to £838.8 million, following Senior’s rejection of another proposal last week. The U.S. group said that this would be its fifth and final offer for Senior.
But the standout stock in London was Morrisons —one of the U.K.’s largest supermarket groups and e-commerce giant Amazon’s /zigman2/quotes/210331248/composite AMZN -5.95% grocery delivery partner in the country. Shares in Morrisons jumped near 28% as analysts expect the company to attract more takeover bids, after rejecting an offer from U.S. private equity firm Clayton, Dubilier & Rice over the weekend valuing the company at £8.7 billion ($12 billion) including debt.
Lloyds Banking /zigman2/quotes/202285510/delayed UK:LLOY -2.32% stock fell near 1% before paring losses to settle 1.2% higher after a report over the weekend that the group was set to buy its first property under a new plan to diversify its revenues by becoming a private landlord. The bank is close to securing a block of flats in Peterborough and could begin renting them out next month, in a move that would make it the first major U.K. retail bank to move into private rentals, the Mail on Sunday reported .