London Market: Stocks expected to gain

By Susan Marshall and Jeff Brooks

UK stocks are expected to gain as prospects for unchanged interest rates brighten the outlook for profits.

The FT-SE 100 index gained 2.5 per cent last week to 5,893.9, even after falling 2.4 per cent on Monday. Stocks fell amid concern that borrowing costs may rise in the US, then recovered losses as speculation weakened. That leaves the benchmark index 95.5 points from its closing high, which it recorded on 6 April.

"The market does have the ability to shrug off bad news - it wouldn't surprise me to see it move to new records," said Mike Grimble, investment strategist at Norwich Union Management. Mr Grimble said he doesn't expect rates to rise next week. An announcement of the decision is expected on Thursday.

Among economic reports due are April narrow money supply growth, a purchasing managers' survey of service industry activity on Wednesday and a survey of retail sales on Thursday. These are unlikely to change the outlook for stable interest rates.

"The MPC meeting will be a key focus for gilts, but I think the market is through the phase of getting nervous ahead of the decision," said Phil Tyson, an international economist at HSBC Markets. "Even so, unchanged rates are well priced in. A week of consolidation looks likely, with moves in the US market giving little directional lead."

That's assuming the weekend's summit meetings to decide the starting line-up for Europe's single currency don't throw up any nasty surprises, Mr Tyson said. Were there to be any developments that threatened the credibility of the euro, gilts and Treasuries would probably be the main beneficiaries.

The yield on the benchmark 7.25 per cent 10-year UK government bond fell 17 basis points last week to 5.75 per cent. "I think rates have definitely peaked, and it's now a case of looking for them to start coming down," said Gregor Macintosh at Edinburgh Fund Managers. "If we continue to see the economy slowing rates, we could be down to 6.75 per cent by the year- end."

Drug stocks led the gains, with Glaxo Wellcome and SmithKline Beecham together adding 42 points to the FT-SE 100 increase. Oil stocks were also among the gainers, rising in step with oil prices. Crude oil rose as estimates showed that production cuts pledged by Opec countries came close to promised targets.

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