International markets: London - New highs in prospect

UK STOCKS and bonds could rise this week on top of the record highs on Friday as merger speculation boosts Glaxo Wellcome. The Bank of England is expected to leave interest rates unchanged at its monetary meeting.

The FT-SE 100 rose 2 per cent last week to close at a record 6064.2 on Friday. Pharmaceuticals were the biggest gainers, adding about 9 per cent in the five days: Glaxo added 14 per cent.

The 250 Index of medium-sized companies continued its recent charge and ended the week at a record 5557.6, up 22.2 points in three days and up 15 per cent so far this year.

Investors said further advances could depend on at least one big merger becoming a reality, after talks of several link-ups in financial, telecoms and drugs industries fizzled out. However, completion of such a merger could be followed by a slump as investors sell stocks, reasoning that another won't be along soon.

The monetary policy committee meets on Wednesday and Thursday, with an announcement of its rate decision expected at noon on Thursday. Few economists are expecting a rate rise. "The meeting will be the focus of the week for gilts, and with rates almost certain to be held the market should be able to rally," said Philip Shaw, chief economist at Investec. "But the economy is strong enough for rates to rise one more time, probably in May."

Market sentiment is that the central bank is plagued by fear of inflation rather than inflation itself, and is also worried about sterling strength and the impact on exporters if rates are raised again.

The only domestic economic reports due this week are manufacturing output and industrial production for February, released on Monday. Analysts expect they will show that the manufacturing economy remains weak, supporting the argument to leaving rates unchanged.

On Friday gilts rose, with the yield on the 10-year UK government bond falling 5 basis points to 5.76 per cent helped by gains in US Treasuries and a survey suggesting growth in service industry activity is easing.

Ten-year gilts now yield 102 basis points more than their German counterparts. The spread between UK and German yields is likely to narrow toward 50 basis points later this year. Once UK interest rates have reached their peak and German rates start to move up, as most analysts suspect they soon will, gilts will outperform sharply.

Few companies are reporting earnings this week, and the focus could settle on foreign rather than UK companies. Motorola, which makes computer chips and mobile phones, warned last month that first-quarter earnings would be reduced by slow demand from Asia: it announces earnings this week.

When the company warned that its profits would be 25 per cent lower than previously expected, stocks fell because it was interpreted as a warning to businesses with sales in Asia. Car distributor Inchcape is among these, and also reports this week.

Copyright: IOS & Bloomberg