International Markets: London - Stocks to rally after rate fears subside

Stocks are expected to rise this week, building on recent gains, while bonds are likely to consolidate on optimism that interest rates are not about to rise.

A report on inflation on Tuesday is expected to underpin confidence that the economy is growing at a moderate pace. This could add to optimism after Friday's report that an unexpectedly small increase in the number of new jobs in the US economy triggered a rally in global markets.

The FT-SE 100 index soared 0.66 per cent, to 5330.8 on Friday and rose 2 per cent on the week. Banks and British companies with shares traded in the US led gainers on Friday, and are expected to shoulder the UK market higher in coming days.

"It's likely to be a financial focus. Banks will be driving the market," said John Hayes, deputy head of research at Commercial Union Asset Management.

One question hanging over the banking sector is Barclays, which plunged 50.5p on Friday to 1,696.5 after the company said it will split its investment banking business BZW and sell its less profitable parts.

Some investors said they were relieved that Barclays had decided to take action on BZW. "BZW was destroying shareholder value, and Taylor always said that if it couldn't generate sufficient returns, it would be taken care of," said Mark William- son, banking analyst at Albert E Sharp. "They recognised this and the fact they are doing something about it is positive."

Oil stocks such as Shell Transport & Trading, Enterprise Oil and British Petroleum may gain, pacing rising oil prices after the US government sent the USS Nimitz, a nuclear aircraft carrier, to the Persian Gulf to bolster security for the no-fly zone in southern Iraq.

Next week sees reports on industrial production and a CBI distributive trades survey. The Bank of England monetary policy committee's monthly meeting is midweek, which will set the tone in the gilt market.

"I would expect the market to pause for breath," said Kevin Adams, bond strategist at BZW. "While I don't see any move on rates from the monetary policy committee, the market will be pay attention to inflation data."

Gilts soared on Friday as reports lessened concerns of rises in official interest rates in both the US and the UK. The benchmark 10-year gilt yield fell 13 basis points to 6.19 per cent, its lowest since 25 January 1994.

The Chartered Institute of Purchasing and Supply's monthly survey of service industries showed slowing growth and moderate inflation, dampening concern about how high official rates will rise in the UK. "The gilt market should take heart from a weaker-than-expected service sector PMI survey," said James Mckay of Painewebber International. "Bottleneck pressures and inflation are moderating."

Gilts were boosted by heightened speculation Britain would join EMU earlier than expected, following comments from the Government's minister without portfolio, Peter Mandelson. The Treasury denied there had been a change in government policy.

Copyright: IOS & Bloomberg