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UK stocks may decline this week, led by banks such as Lloyds TSB, on concern over Indonesia's economic collapse, a possible rise in interest rates and the possibility of increased regulation.
Shares in Northern Rock tumbled on Friday after the OFT said it would investigate whether the mortgage lender changed clients' accounts without telling them. "The investigation introduces the possibility of regulation," said Nat Jolowicz, a fund manager at Quiltor & Co.
"Plus the problems in Indonesia and things look difficult for the banking sector in the short term." However, he added, "the long-term perspectives for the industry still look good."
The benchmark FT-SE 100 Index fell 0.86 per cent to 5917.8 last week, led by banks and insurance companies. The FT-SE Insurance Index fell 5.82 per cent, while the FT-SE Bank Index slid 4.83 per cent.
Stocks likely to be heavily traded this week are Marks and Spencer, British Telecom and National Power, which all report earnings.
Others could extend losses if civil unrest in Indonesia deepens or threatens to spread to other countries in the region. HSBC has lent pounds 1.1bn pounds to Indonesian companies.
Even so, some fund managers thought that Asia's economic woes could even attract some investors to the UK.
"In an international context, the UK is better placed to withstand external shocks," said Michael Hughes, director of Baring Asset Management.
Gilts are seen to be rising on the growing conviction that official interest rates won't rise again and may even fall by the end of the year. The rise in gilt yields over the past week is also expected to lure investors back to the market.
While reports on inflation, due on Tuesday, and retail sales on Thursday are likely to be stronger than the previous month's numbers, analysts say this is already reflected in bond prices. An auction of longer-maturity gilts on Wednesday is expected to meet ample demand and that should also boost prices.
"I think this adjustment to rate expectations is at or very near an end, and that should help gilts recover some lost ground," said Phil Tyson, a market strategist at HSBC Markets.
"The [inflation and sales] data will be strong, but that's well discounted. And if the auction goes well, which it should after the rise in yields, the long end will fare pretty well this week."
The yield on the 7.25 per cent benchmark government bond rose to 5.97 per cent.
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