Investors will be closely watching profits from HSBC Holdings and Standard Chartered - both banks that are heavily exposed to Asia - to gauge how deeply the slowdown in Asian economies is likely to hurt company earnings.
The benchmark FT-SE 100 index rose 169.3 points, or 3.03 per cent, to a record 5,751.6 last week, bolstered by gains from banks and insurers amid speculation about more takeovers among financial companies. The FT- SE Insurance index led the week's gains, rising 9.95 per cent, with Royal & Sun Alliance up 12.1 per cent and Commercial Union up 12.2 per cent.
Insurers Commercial Union, Guardian Royal Exchange, Prudential and Alliance & Leicester are all scheduled to report earnings this week.
Bonds are likely to be little changed as investors reassess the outlook for official interest rates after Bank of England Governor Eddie George said on Friday that Britain should "contemplate the possibility" of further increases. Mr George said the decision on whether to raise rates again was "very finely balanced".
"My feeling is the Bank of England are trying to talk rates up without actually putting them up," said Nick Vaughan, an economist at Barclays Capital. "If they were really worried about things, they would have put rates up in February. Our view is official rates have peaked and the bank wants to avoid sterling coming off too sharply."
Mr George's remarks "suggest that a medium-term base rate hike is still likely," said Kirit Shah, an economist at Sanwa International.
The Bank of England's Monetary Policy Committee next meets to set interest rates on 4 March.
HSBC Holdings is expected to post net income of pounds 3.45bn, a rise of 11 per cent on a year earlier. Meanwhile Standard Chartered, is expected to post net income of pounds 567m, a decline of 4 per cent on a year earlier.
Another bank, National Westminster, is expected to say 1997 net income rose 53 per cent to pounds 716m. The bank is seen as a likely candidate for merger or acquisition. "NatWest has a lot of very patient shareholders. I think they want to see some corporate activity'' such as a merger or acquisition, said Michael Trippitt, an analyst at Schroders, which has a "sell" recommendation on the bank.
This weekend's London meeting of finance ministers of the Group of Seven industrialised nations might also help set the outlook for stocks in the coming days. They are likely to criticise Japan's latest package of measures designed to boost its economy as insufficient. If successful, pressure for Japan to do more to resuscitate Asian economies could mean the region's economic slowdown won't slow global growth.
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