International Markets: London: Strong pound hits hard

STOCKS are expected to be mixed this week on concern a strong pound will hobble exporters' profits, offsetting optimism on both sides of the Atlantic that inflation will remain benign. Bonds are seen rising, especially shorter-term ones if economic reports support the view that interest rates won't rise again.

The pound was last near an eight-year high of 3.0879 against the mark, pushed higher by concern that the Bank of England could raise interest rates again soon. That hurts exporters such as LucasVarity, which must convert mark or franc sales into sterling.

"It's terrible out there for the engineers," said Tom Eyre, a fund manager at BWD Rensburg. "At 3.1 marks, we really do get into deep water."

The FT-SE Engineering Index has gained only 16 per cent during the past 260 trading days, compared with a 36 per cent rise in the benchmark index. The pound has risen 28 per cent against the currencies of Britain's main trading partners in the past 18 months.

The FT-SE 100 on Friday rose 33.7 points to 5939.3, down 0.29 per cent on the week. The index reached a record 6105.8 on 20 March. Losses by Next, Britain's third-largest fashion retailer that issued a profit warning, offset gains by oil companies such as Shell and BP.

Oil shares gained last week after oil prices soared. Investors expect OPEC and non-OPEC producers will cut supplies to boost oil prices, which recently fell to their lowest in almost a decade. OPEC meets on Monday and the producer group is expected to ratify a cutback in quotas in line with planned reductions announced earlier this month.

Stocks have jumped in Europe and the US to record levels this year on stable growth combined with low inflation, raising expectations that interest rates won't rise much more, even though another rate rise is possible in the UK.

"As long as interest rates remain low, and as long as companies talk about improving shareholder value, the market will go the right way," said Joe Hall, a director at Deutsche Morgan Grenfell.

Economic reports this week include narrow money supply and consumer credit on Monday, a purchasing managers' survey of manufacturing on Wednesday, a survey of retail sales on Thursday and a purchasing managers' services survey on Friday.

"Overall the data should show a weaker consumer sector, underlining the case for rates to stay unchanged and boosting gilts," said Edmund Nonis, an economist at Nikko Europe, who is advising clients to buy gilts. "We'll probably get the familiar message that the services sector remains strong, but the weight of data will point to a slowdown and that should see the short-end outperform."

Friday, gilts fell along with overseas debt. "It's difficult for gilts to make headway when bond markets generally are looking top-heavy," said Doug Jones, fund manager at Gartmore Investment Management, adding that concern UK interest rates will rise again is holding gilts back.

Copyright: IOS & Bloomberg