London Market: Latin crisis weighs down on shares

THE prospect of disappointing sales from retailers Debenhams and Arcadia, and the threat of recession in Latin America weighing on banks, could push stocks lower this week. Diageo is also likely to be active as it will make a statement on recent business.

Debenhams and Arcadia are set to join Marks & Spencer, Storehouse and Argos in reporting a drop in sales during the Christmas period. These statements are likely to be backed up by December sales figures due for release on Wednesday. "I would continue to avoid that sector for the moment," said Graham Wood, head of equities at Standard Life Assurance. "It's not just the unusual behaviour of the consumer but oversupply as well."

The FT-SE 100 index fell 3.4 per cent last week, falling four days out of five, although it rose 2.08 per cent to 5,941.0 on Friday. Banks and retailers led the declines.

Diageo may slip as it could warn of slowing sales in Latin America. "It's going to be downbeat on Latin America," said Stuart Forshaw at Charterhouse Tilney.

Lloyds TSB could lead banks lower, extending an 11 per cent drop last week. The bank has offices in Brazil, Argentina and other Latin American countries and was hurt after Brazil allowed its currency to devalue. The threat of recession in Brazil means that banks could be saddled with bad debts from companies in the region.

"What the markets are worried about is whether you get large-scale default on what they owe, which threatens financial institutions," said Mr Wood. Among other banks, National Westminster fell 11.6 per cent, Standard Chartered 9 per cent and HSBC 4 per cent.

Gilts are expected to rise as hopes for further interest rate cuts are bolstered by a series of economic reports including figures for inflation, retail sales and fourth-quarter gross domestic product, and the minutes of the Bank of England meeting earlier this month, when rates were cut.

"Overall the reports should underline the case for further easing," said Adam Chester, a treasury economist at Halifax. "The MPC minutes are the most important. I expect they will confirm the bank is poised to cut rates again in February."

The benchmark 9 per cent 10-year gilt yield rose on Friday to 4.28 per cent as stocks rallied when Brazil allowed its currency to float freely. Earlier in the week bonds had gained as stocks fell on concern about Brazil, and analysts expect bonds to continue to fluctuate in opposition to stocks this week.