The good, the bad and the not quite so sure

INTERNATIONAL MARKETS: LONDON

UK stocks face a week of uncertainty as conflicting influences come into play. The turmoil on Asian markets is bound to make people think twice about investing. On the other hand, a set of upbeat reports on the domestic economic, due over the next few days, will paint a picture of optimism.

In the past week, Hong Kong's stock market has been on a roller coaster as investors try to guess whether the province's dollar will be the next in a string of Asian currencies to be devalued. Several British companies, including HSBC Holdings and Cable & Wireless, earn much of their profit in Asia,

"Asia's weakness unsettles sentiment," said Tony Hardy, an investment manager at the Church Commissioners. "Markets, after a long period of outperformance, are going through a correction."

The FT-SE 100 index fell 2.6 per cent last week to 4842.3, bringing the drop over the month to 7.7 per cent. The Index has fallen from an all- time high of 5367.3 on 2 October. All the same, the FT-SE 100 is still up 16 per cent this year. "There continue to be worries because the Far East is still weak," Hardy said. "I don't think it's a crisis, but there are some quite serious implications in South-east Asia."

Hong Kong's Hang Seng index fell 4.7 per cent last week as interest rates rose, threatening corporate earnings.

In the UK, however, it's a different story. "The economic fundamentals are looking good and gilts look good," said Job Curtis, a money manager at Henderson Investors. "We could see a healthy rally in December."

"Over the past week we've looked to put money in rather than take it out," said Hardy. All the same, Hardy said he didn't expect the FT-SE 100 to rise above 5000 in the next six months.

The domestic focus will be on interest rates as the Bank of England monetary policy committee meets on Wednesday and Thursday. Many analysts who expected a rise in interest rates now believe rates will be left unchanged because the central bank might be wary of triggering further equity market losses.

The economic bulletins begin on Monday with a report on narrow money supply, or M0, for October and a purchasing manager's manufacturing survey. Wednesday sees the release of industrial production figures for September and the purchasing manager's services sector survey. On Thursday, the Confederation of British Industry releases its latest distributive trades survey.

The futures market is flagging a base rate rise before year-end. The yield on the December short sterling futures contract, a measure of interest rate expectations, fell one basis point to 7.34 per cent above the base rate of 7 per cent.

Some investors disagree. "Rates should remain on hold at 7 per cent," said Michael Markham, a fund manager with Invesco Asset Management. "We could well see another quarter-point rise, as the Bank of England exhibits its anti-inflation credentials, but I don't think it's needed."

Markham said he continues to hold overweight positions in gilts within his European bond portfolios, and that he favours longer-dated bonds as he sees demand outstripping supply.

"As deficits fall and government borrowing declines, the supply of gilts will have to fall. But pension funds still need to buy gilts, and I think the volatility in stock markets will see more investors switching to bonds now they've seen equities are not a one-way bet," he said.

For the moment, UK stocks will remain prey to events in the US. The FT- SE tumbled to a six- month low of 4382.8 on Tuesday after a slump in US stocks sparked similar declines around the world.

"The US is the critical factor," Curtis said. "If Wall Street suffers I can't see us doing well."

Among companies reporting earnings next week, Marks & Spencer is likely to announce that first-half profit per share rose 10 per cent, to 11.4 pence. Also reporting earnings next week are Shell Transport & Trading Plc, Associated British Foods Plc, Powerscreen International Plc, British Airways Plc, Kwik Save Group Plc, Boots Company Plc, Whitbread Plc and Royal & Sun Alliance report on Thursday.

Copyright: IOS & Bloomberg