International Markets: London - Stocks look set to end year on a festive note

UK stocks and bonds are likely to be lifted by talk of takeovers and optimism that interest rates will not rise much further in the new year as economic reports show output growing and inflation remaining stable. An auction of new five-year gilts is also expected to meet good demand, underpinning the market.

The benchmark FT-SE 100 rose by 1.2 per cent on Friday to 5,142.9. Shares rose 6.4 per cent in the week, or 311.1 points, the biggest five-day point gain ever.

The FT-SE Insurance and the FT-SE Bank sub-indices led the gainers this week, with Standard Chartered, Lloyds TSB and Prudential among the biggest risers.

"Banks and financials are the sector to be in," said Hilton Nathanson, head of UK equities at Kyte Securities. "It's a dangerous market to go against."

British stocks are poised to gain overall for a fourth consecutive year, analysts said. SBC Warburg Dillon Read said it expected the FT-SE 100 to reach 6,000 in the year, lifted by expectations of lower interest rates and a weaker pound.

Investment bank UBS set a year-end target of 5,600 on the FT-SE 100, while Goldman Sachs expected the index to reach 5,350. Merrill Lynch also sees further gains.

While most traders think policy makers will need to raise the benchmark securities repurchase rate once more to slow growth and control inflation, many also think rates are near their peak. This week, the Bank of England left official interest rates unchanged at 7.25 per cent.

Reports on manufacturing, industrial production, producer prices, retail prices and economic trends could boost stocks if they confirm expectations that inflation is under control.

Economists believe the underlying rate of inflation (excluding mortgage interest payments) rose by 2.8 per cent in the year to November, unchanged from October. "The numbers next week should lift the market," said Steve Andrew, fixed-income analyst at Merrill Lynch. "We look for modest output growth and stable prices, and see the gilt auction going well as it features a new benchmark issue."

The benchmark 7.25 per cent, 10-year government bond yield closed on Friday at 6.53 per cent, hurt on Friday by international developments, especially the fall in US Treasuries.

Investors said gilts could be dragged down if the cash that has been flowing into bonds during the stock market turmoil might now be moving into stocks instead as markets stabilise, as suggested by last week's market gains.

Among the companies scheduled to report earnings this week are Compass Group, Airtours, British Land, David S Smith Holdings, LucasVarity, Racal Electronics and Asda Group. Multiple high-street retailers such as Marks and Spencer could also get a lift as the traditional Christmas shopping season reaches its peak .

Copyright: IOS & Bloomberg

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