International Markets: London - The two-speed economy

STOCKS may decline this week as a strong pound weighs down on exporters and investors wait for another slide in bond yields before buying banks, utilities or insurance stocks again.

The Bank of England's monthly policy meeting - no change on rates is expected - and domestic economic reports are likely to be outweighed by events elsewhere, particularly the US. Reports are expected to confirm that the UK now has a two-speed economy, with manufacturing slowing while services continue to grow.

Among the reports due this week are narrow money supply growth, purchasing managers' surveys on manufacturing and service industries, a survey of retail sales and figures for industrial and manufacturing production.

With little sign of an economic slowdown, gilts are likely to underperform next week. The benchmark 10-year UK government yield fell 4 basis points on Friday to 6.04 per cent.

Concern that the full impact of Asia's economic crisis hasn't yet been felt on corporate earnings in the US and Europe may also weigh on stocks. Last week the FT-SE 100 index rose 277.1 points, or 5.3 per cent, to a record 5458.5, bolstered by gains in banks, take-over speculation and oil stocks as crude prices rallied.

The oil-integrated index rose 9.1 per cent over the week, with BP up 10.9 per cent and Shell Transport & Trading up 7.4 per cent. Brent crude for March delivery rose 8 per cent to $15.94 a barrel over the week on fears that the US is poised to launch a military strike against Iraq.

Still, oil stocks may not extend recent gains. "Oil companies could see a dramatic reversal in their performance," said Savvas Savouri, a strategist at Credit Lyonnais Laing.

Investors will be looking to the Bank of England's monetary policy committee on Tuesday and Wednesday to see if interest rates rise for a sixth time in 12 months. An announcement is expected at noon on Wednesday.

Bank governor Eddie George said on Wednesday that recent indications showed growth "may indeed already have begun to slow down [but] the crucial question is: will the slowdown come soon enough, and be sufficient, to avoid the emergence of inflationary pressures."

Manufacturing stocks may decline as the strong pound impacts foreign sales and profits.

"Across the general manufacturers sector we'll see a wholesale downgrading," Mr Savouri said. He named Blue Circle and Hepworth as companies which may suffer.

Banks and insurance companies may help offset declines elsewhere, chiefly on take-over speculation. The FT-SE Life Insurance index was up 9.2 per cent last week, and the Banks, Retail index was up 9.7 per cent.

Reporting profits next week are BSkyB on Tuesday and ICI on Thursday. J Sainsbury issues a trading statement on Friday.

Copyright: IOS & Bloomberg

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