International markets: London - Blue chips to set tone

Earnings reports from some of the FT-SE 100's larger companies will set the tone for stocks this week, while government bonds may fall if a report on retail sales is strong enough to fuel concern the Bank of England will need to raise interest rates again.

Economists are expecting retail sales to have risen 1.8 per cent for last month, rebounding from a decline of 1.9 per cent in September. The figures are issued next Wednesday.

"If we did get a strong figure in retail sales you may see [gilts] come off a bit," said Shahid Ikram, manager at Commercial Union Asset Management.

In the equity market, exporters will be the focus of attention as investors look to see how the strength of the pound threatens their outlook. Glaxo Wellcome, Granada Group and BOC Group are due to release earnings.

The FT-SE 100 index was little changed last week, falling 0.6 per cent to 4,739.9, mainly due to turmoil in Asian markets, which swept through Europe and the Americas, and a rising pound.

Smiths Industries was among the biggest percentage losers, as the pound rallied amid expectations of a sixth interest rate rise this year.

"We wouldn't be surprised if sterling goes even higher at these levels," said one analyst. "It's possible base rates may have to rise again."

Gilts posted their biggest gains in six weeks on Friday, and the yield on the 10-year UK government bonds fell to 6.64 per cent. They rose with other European bonds after Bundesbank President Hans Tietmeyer said interest rates under the economic and monetary union slated to begin in January 1999 should be oriented to the "lowest levels" of participant countries.

While the UK will not join the single European currency at its inception, "to have continental rates stable would be good for bunds, good for French [bonds], and would allow gilts to hold the current spread against those markets," said Stephen Lewis, chief economist at London Bond Broking.

Many investors interpreted this week's inflation report from the Bank of England as confirming it will raise rates at least once more.

Bank of England Deputy Governor Mervyn King said the risk of accelerating inflation is "more on the upside than down". He also said the Bank is not "in pause mode" on interest rates, even after raising its base lending rate last week.

"Monetary officials suggested they'll continue to be cautious, therefore we have to anticipate higher rates," said James Craigen, manager of money markets at Gulf International Bank. "An increase to 7.5 per cent is pretty likely. Whether it happens in December is a fifty-fifty call."

Other economic reports include third-quarter output, input and expenditure and public sector borrowing requirements. The Bank of England will also give its provisional estimates for M4 money supply in October.

Other companies reporting earnings include electricity companies National Power and PowerGen, which are both scheduled to report half-year results, as are British Steel, FirstBus, Vodafone, Safeway, De La Rue Group, and Northern Foods.

Copyright: IOS & Bloomberg