The Week Ahead: FTSE reshuffles the pack as central banks make their play

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The Independent Online

It promises to be a week of upheaval on the markets, with the list of winners and losers about to emerge from the FTSE's quarterly reshuffle and a series of key interest rate decisions to be made in the UK and around the globe.

While not calculated until later this week, those looking likely to be elevated to the FTSE 100 include stocks that have ridden the commodity and energy price boom: miners Vedanta Resources and Lonmin, and electricity generator Drax. This would be a remarkable reversal of fortune for Drax, which narrowly staved off bankruptcy just four years ago. Following a major restructuring, and a failed attempt to sell itself, it relisted last year.

Making room for the new entrants could be Cable & Wireless, Ladbrokes - which recently spun off its Hilton hotel business - and Rentokil Initial.

Inclusion in the top flight is important for companies as it not only raises their profile but creates immediate demand for their shares, as index-tracking funds are forced to acquire and hold the company. The changes will be based on Tuesday's closing prices and come into effect a few weeks later.

Central bankers tend to move in packs. This week, interest rate decisions are due from the Bank of England, European Central Bank (ECB) and the Reserve Bank of Australia.

Wednesday and Thursday's meeting of the Bank's Monetary Policy Committee, the rate-setting body, marks the debut of controversial appointee David Blanchflower, replacing the doveish Stephen Nickell. While David Page, an economist at Investec, feels that Mr Blanchflower's ascension lends a slight tightening bias to the committee, the chances of a rate rise this month are seen as minimal.

"We think rates are set to rise to 4.75 per cent, but we do not see this rise until August," he said, citing the "Maradona theory of interest rates" - a phrase coined by the Bank's Governor, Mervyn King. This refers to Maradona's famous (other) goal against England, when defenders were so sure he would swerve as he flew down the pitch that they swerved before he did. The theory is that the "threat" of a rate rise is enough to change market behaviour and thus make a real move redundant.

The market may also see the first proper signs of a World Cup-led consumer bounce, with the British Retail Consortium primed to release its sales monitor for May this week.

The ECB has been quite open about its interest rate intentions for Thursday's announcement. While a few doomsayers are talking up a 0.5 per cent rise, spooked by recent eurozone inflation and robust credit growth figures, the market is assuming a 0.25 per cent increase to 2.75 per cent.

Meanwhile, Australian property company Westfield is likely to emerge as the owner of Stratford City, the £4bn project bordering the 2012 Olympic site.

Back in the land of equities, Halfords will post a muted full-year pre-tax profit of around £77m as a shrinking operating margin eats into the bottom line. Since hitting a 355p high last year, the shares of the car parts and bicycle retailer have slumped by 17 per cent, largely due to April's shock profit warning.

"The sales are coming through quite strongly but the margin mix is going against the firm," said Mark Charnock, an analyst at Investec. "Sales in high-margin products such as car maintenance have been a bit lacklustre, while less profitable things such as satellite navigation have been strong." He predicts a 3 per cent decline in gross margin in 2006, with further weakness to come though in 2007.

From car parts to bling, and there are results from Signet and celeb jeweller Theo Fennell. The team at Lehman Brothers predicts that Signet, which owns Ernest Jones among other jewellry chains, will post a marginal first-quarter pre-tax profit increase to £29m.

But the outlook looks increasingly challenging given that more than three-quarters of Signet's sales are derived from its US business. The group is exposed to the depreciating dollar and soaring precious metal prices - not all of which it can pass through to shoppers. "The potential of a US consumer slowdown in the second half also weighs on sentiment," said Allegra Piaggi, an analyst at Lehman Brothers, referring to her recent rating and earnings downgrade of the company.

By contrast, niche rival Theo Fennell is set to report a sales-led surge in pre-tax profit as its revamped lines have struck a chord with the groovy set.

And finally, the budget airline Ryanair taxis into view this week, with the market expecting a solid 11 per cent increase in pre-tax profit to €330m (£226m). Mike Powell, an analyst at Dresdner Kleinwort Wasserstein, is even more upbeat, looking for a €341m result from the Irish carrier. "It's been a good year in terms of volume and prices have been pretty robust," he said, highlighting the underlying improvement in cost per passenger in the first nine months of the year.

But it's not all plain sailing: Ryanair does not hedge its fuel costs and will find it difficult to avoid passing these rising prices on to its customers.

CALENDAR

Tomorrow 5

UK RESULTS: (final) Chloride, Detica, E2V Technologies, Glotel, Theo Fennell, Uniq; (interim) Sumus

Tuesday 6

UK RESULTS: (F) Berkeley, Carphone Warehouse, Christian Salvesen, Crest Nicholson, First Property, Focus Solutions, Hampson Industries, Helical Bar, Intelek, Intermediate Capital, RPC, Severn Trent, Synergy Healthcare, Telecom Plus, Umeco, Volex; (I) Dawson, Future, Victrex

Ireland: (F) Ryanair

Wednesday 7

UK RESULTS: (F) Chapelthorpe, Danke Business Systems, GB, Genus, Protherics, Strategic Thought; (I) Gooch & Housego, Theratase

Thursday 8

UK RESULTS: (F) AEA Technology, FKI, Halfords, Indago Petroleum, McKay Securities, Scapa, Vp, Wagon, Whitehead Mann, Wincanton

Friday 9

UK RESULTS: (F) Fuller Smith & Turner; (I) Internet Business; (1Q) Signet

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