"This market is going to be marginally down,'' said Guy Monson, director at Sarasin Investment Management. "It's high valuations and the Asian question-mark hanging over earnings - there's very little room for earnings disappointment."
The FT-SE 100 index rose 5.2 per cent on the week to 4985.8 mainly due to a rebound from the collapse in Asian markets, which has seen markets worldwide surging. Gilts fell, along with other European debt and US bonds, as stock gains reduced the appeal of bonds as a safe haven and the yield on the benchmark 7.25 per cent 10-year government bond rose to 6.56 per cent on Friday.
UK government bonds this week are expected to rise if the Government honours its pledge to keep a tight rein on public spending when it outlines plans for next year's Budget on Tuesday. Chancellor of the Exchequer Gordon Brown is expected to introduce plans for a "code of fiscal stability" that legally commits the Treasury to tight control over public spending.
"The `green budget' on Tuesday will be the main focus for gilts next week," said Adam Chester, treasury economist at Halifax. "If, as I would expect, the Chancellor promises to keep a tight public purse, then gilts should benefit."
Meanwhile, investors will study a slew of company earnings for evidence on how some of Britain's bigger companies are performing. The largest company reporting earnings is Royal Bank of Scotland, due on Thursday.
Also reporting profits this week are United Utilities, Severn Trent, Wessex Water and Yorkshire Water, four of the eight utilities in the water index. Other companies include National Grid, music retailer EMI Group and 3I Group. British Biotech, Thorn, Southern Electric, London International Group and Johnson Matthey publish results on first-half trading.
Companies that are susceptible to Asia's highs and lows, such as HSBC Holdings and Standard Chartered, could fall if Asian markets resume their roller coaster activity.
"I'm not convinced we're through the turbulence (in Asia) yet," said Steven Peak, senior European investment manager, at Henderson Investors. "There's still a lot of caution."
Expectations for higher interest rates were dampened on Thursday after the Government revised down figures for economic growth in the third quarter, easing concern inflation would continue accelerating.
Kirit Shah, senior strategist at Sanwa International, said he expects another base-rate increase early next year, and he sees rates reaching 7.75 or even 8 per cent during 1998. "The tightening we've had so far has had little or no effect on the economy."
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