London Market: Fear drives hunger for cash

UK stocks are expected to gain this week, led by HSBC Holdings, Lloyds TSB Group and other banks on optimism interest rates will fall around the world as policymakers try to arrest an economic slowdown.

"Interest rates will come down, there's no question about it - it's just a question of when and by how much," said Simon Toynbee, fund manager at Majedie Investments.

The FT-SE 100 index Friday gained 124.5 points to 4823.4, its gains led by banks. Five stocks rose for every one that fell. Still, the index gained just 1.54 per cent this week following steep declines on Wednesday and Thursday as a weak dollar and concern over global growth hit exporters.

The FT-SE Banking Index led the week's gains with HSBC and Standard Chartered spearheading the ascent. HSBC, which makes about 45 per cent of its profit in Asia, rose 19 per cent on the week. Standard Chartered, which does more than half its business in Asia, gained 23 per cent.

Banks are expected to lead gains again after the Bank of England lowered official interest rates to 7.25 per cent in an effort to spur growth. "This move represents just the start of a process that should continue as further hard evidence of the economic slowdown emerges," said Jeremy Batstone, at NatWest Stockbrokers. "It indicates that the authorities are aware of the risks posed to the British economy by the global turmoil."

Bonds are expected to extend losses, as investors shift funds from long- term government debt to the safety of cash deposits and shorter-maturity bonds. Gilts snapped a two-month rally last week on concern that hedge funds were selling to cover their losses in other markets. That sent many investors to less risky assets, such as money market securities.

"This market is all about greed and fear," said Tim Harris, a market strategist at National Australia Bank. "We've seen the greed, and now we're seeing the fear. All anybody wants to own at the moment is cash."

On Friday, gilts fell for a fourth day, slumping to their biggest loss in almost four years. The 9 per cent, 10-year government bond yield rose 33 basis points to 5.17 per cent.

A series of reports due this week, including bulletins on inflation, the labour market and government borrowing, are likely to have little effect on gilt prices, because they'll be overshadowed by developments in global financial markets.