Rumour kicks the FT-SE

INTERNATIONAL MARKETS: London

UK STOCKS may extend recent gains this week as speculation over mergers and acquisitions encourages cash-flush fund managers to plough in more money. Bonds are expected to be little changed as investors wait to see whether interest rates will rise again.

"The market isn't being driven by fundamentals; it's being driven by speculation and rumour," said Graham Campbell, a fund manager at Edinburgh Fund Managers. "Short-term, stocks can still go higher."

The benchmark FT-SE 100 Index rose 3.01 per cent to 5956.3 last week, bringing the rally since 31 December to 16 per cent. Stocks were led higher by BT, which said it was looking for a partner to gain a foothold in the $200bn (pounds 125bn) a year US phone market. The FT-SE Telecommunications Index rose 9.44 per cent over the week to 3904.9, with BT jumping 63p to 681p.

"Takeover speculation will continue to boost stocks," said Richard Kersley, a strategist at Credit Suisse First Boston. "Corporate activity is an ongoing theme." Such speculation has driven up banks, insurance companies and pharmaceuticals.

Mr Campbell said he favoured blue-chip stocks which were not exposed to the turmoil in Asia, such as Glaxo Wellcome, SmithKline Beecham and General Accident. But he did not favour British Steel or ICI.

"There's no pressures to cause [the market] to crack," said Tim Dyer, a director at SG Securities. "We've had the Budget, and that was a non- event."

Fund managers are flush with money and find UK stocks good value compared with counterparts overseas, even though the FT-SE 100 has set 16 closing highs this year, Mr Campbell said. Recent share buy-backs have returned about pounds 10bn to investors, money they are putting back into stocks, he said.

"Valuations are getting fairly stretched but people just don't want to sell," said James Dewhurst, equities salesman at Charterhouse Tilney Securities.

Rallies in Europe and the US are encouraging fund managers to channel funds into the UK. "Investors are looking for the highest common denominator," pushing UK stocks up to valuation levels prevailing in Europe and the US, said Mr Campbell. As a result "the market is losing sight of fundamentals."

Concern over interest rates and Asia's economic turmoil may still affect sentiment. "None of these issues have gone away, we've just stopped talking about them," he said, adding that the next move in interest rates was more likely to be up than down.

"The numbers over the coming week aren't going to be enough to push rate sentiment one way or the other," said Juli Collins Thompson, a strategist at BNP Global Markets Research, who is advising clients to hold existing gilt positions.

On Friday gilts rose as concern eased that interest rates would rise again after a member of the Bank of England's monetary policy committee said the economy was slowing.