FT-SE 100: Treasurers turn back to cash

LONDON MARKET

UK stocks are expected to fall this week and gilts to extend gains, pushing yields to new lows, as investors shun equities on concern over the impact of slowing growth on profits. "Corporate treasurers are saying: 'I want no risk'. They're parking their money in gilts or cash," said John McNeill, market strategist at Sutherlands stockbrokers. "If it's the only thing that people are willing to buy then yields can go to nothing."

On Friday, the benchmark 7.25 per cent 10-year government bond yield closed at 5 per cent, having touched 4.98 per cent, the lowest in the 30 years for which the Bank of England has records. That's down over 20 basis points since last week and 60 basis points down since mid-August.

Stock markets were shaken last week, sending investors to bonds, after Federal Reserve chairman, Alan Greenspan, dashed hopes of rate cuts to help boost growth. That was followed by a report that the IMF cut its forecast for global economic growth to 2 per cent, from 3.1 per cent in May.

"Wherever equities go, bonds will do the opposite," said James Mitchell, market strategist at Nomura International. "Over the next few weeks yields will be headed lower. We could see 4.75 per cent on the benchmark bond."

Gilts are expected to gain on optimism that the Bank of England will cut interest rates. Reports showed inflation slowed to the target 2.5 per cent rate in August. "UK economic news does point to a reduction in rates," said Robin Younger, equity strategist at Henry Cooke Lumsden.

The FT-SE 100 index on Friday slid 77.3 points, or 1.5 per cent, to 5055.6, led by Shell Transport & Trading, after the company warned it may write down its assets this year because of waning Asian demand and plummeting oil prices. Still, the index closed the week little changed, down 1.23 per cent.

The broader FT-250 index fell 1.08 per cent last week to 4646.8, its losses led by engineering companies that export a large proportion of their products. The FT-SE 350 index, a combination of the other two, dropped 1.2 per cent to 29.5. TI Group slid 21.4 per cent, Cobham lost 14.2 per cent and Siebe fell 15.2 per cent.

"The depressing effect on the UK manufacturing industry from slow growth in export markets and the strength of the pound has resulted in lower growth during 1998," said Richard Jeffrey, chief economist at Charterhouse Tilney.