Market Report: Wolseley constructs rise on US recovery hopes

Wolseley strengthened last night as traders bought in on its exposure to the recovery taking root in the US construction market.

UBS said fiscal austerity packages could delay the expected uptick in European construction volumes, with growth now only likely in 2012. Wolseley, however, should stand firm, drawing steam from its gearing to the US market, where the housing sector seems to have bottomed out and the non-residential market is showing signs of stability. The UK should also prove supportive, with merchanting trends showing signs of improvement. Beyond that, the building materials group, which rose by 40p to 1,564p last night, looks set to reap the dividends of its cost-cutting drive.

"We note that cost-cutting has led to two consecutive profit upgrades so far this year," UBS said, switching its stance to "buy" from "neutral". "Third-quarter, like-for-like trends were slightly better than expected and have resulted in cost reductions dropping faster to the bottom line. Although margin pressure is likely to persist in most end markets, we do not believe these will be sufficient to pose significant downside risk to earnings."

Overall, sentiment steadied as the mining sector, boosted by optimism ahead of today's Chinese export figures, booked gains last night. The strength boosted the FTSE 100, which ended 57.71 points higher at 5,085.86, while the mid-cap FTSE 250 rose by 131.01 points to 9,487.18. Kazakhmys was among the strongest of the miners, rallying 47p to 1,106p amid talk that Chinese authorities may post export data for May that is better than had been expected. The chatter lifted the mood across the commodity markets, which in turn fed through to mining equities. Xstrata at 961.7p, up 36.8p, and Anglo American at 2,538.5p, up 61p, were among the other risers as buyers piled in to the sector. The Eurasian Natural Resources Corporation was also higher, gaining 19p to 982p last night.

London Stock Exchange (LSE) was 4.5p lower at 594p as traders awaited news on the latest index reshuffle, with the review expected to confirm LSE's relegation to the FTSE 250. The results, which were released after the close, held no surprises, putting both LSE and the travel group Thomas Cook, up 4.9p at 195.5p, on the path to the mid-cap index. The changes, which also included Essar Energy's promotion to the FTSE 100, will take effect after the end of business on Friday 18 June. Essar was 11.5p higher at 449.5p at the close last night.

Back on the upside, and the prospect of strength in the Chinese economy helped offset the caution about Europe's debt problems, lifting the market's appetite for risk and underpinning gains across the banking sector. Lloyds fared the best, gaining 1.7p to 53.47p, while Royal Bank of Scotland added 0.63p to 42.08p and Barclays rose by 6.15p to 282.7p.

Tesco added 5.05p to 402.45p, after ING urged investors to make the most of the weakness caused by news that chief executive Sir Terry Leahy will retire next year. "We do not think there is any 'hidden agenda' [in] the timing of Sir Terry Leahy's... planned retirement," the broker said, adding: "While the market was nervous and maybe even slightly surprised with respect to the timing of this announcement, it is important to stress that we expect Tesco's strategy to essentially stay the same."

Also on the upside, the chip marker ARM Holdings was 9.7p stronger at 274p after UBS, returning from a company presentation at its technology conference in New York, said cash returns to shareholders remained on the agenda. Financial targets also remained in place, the broker said, reiterating its "neutral" view and 265p target price on the stock.

The drinks group Diageo, up 28p at 1,091p, was supported by the read across from US peer Brown-Forman's results. "Encouragingly for Diageo, Brown-Forman is... reporting that most of its super premium brands delivered strong growth during the fourth quarter, 'bringing fiscal year comparisons into positive territory'," Evolution Securities said, adding that this appeared to confirm both anecdotal evidence and recent data pointing to an acceleration in premium brand growth.

Elsewhere, commercial property issues were in focus after Morgan Stanley said "the bounce in UK property values is over", adding: "We are increasing our UK capital growth assumptions for 2010 from plus 4 per cent to plus 6 per cent, as we think at least some valuers have a bit of catching up to do, but we do not anticipate more than that."

The broker went on to express a preference for operationally geared companies such as Big Yellow, 6.6p lower at 286p in ex-dividend trading, or Segro, which was 2.9p higher at 264p.

"We think that Big Yellow's occupancy and rents are going to improve gradually as the UK economy creeps out of recession," Morgan Stanley said, reiterating its "overweight" view. The broker is also "overweight" on Segro, which it said was "a scarce play among the UK property majors as it can focus on operational growth rather than having to rely on developments or acquisitions for growth".