International Markets: London - UK watches Asia

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The Independent Online
UK STOCKS are likely to be mixed this week as concern that Asia's turmoil may undermine profits for some companies offsets optimism that interest rates are unlikely to rise soon. Bonds are expected to be little changed, as economic reports are not expected to provide clues about the future of interest rates.

Marks and Spencer and Zen- eca Group will make statements on current trading, while WH Smith releases first-half results including the Christmas season.

The FT-SE 100 index fell 1.55 per cent on the week to 5,181.4. The FT- SE Oil Integrated index led the decline, down 7.4 per cent on the week as oil prices appear to be headed even lower. London crude fell 3.1 per cent to $14.78 on Thursday, its lowest level since April 1994. Prices have fallen 25 per cent in the three months amid fears that lower Asian demand, higher production and further oil sales will result in a glut of crude.

Music group EMI said on Friday that its annual operating profit will miss expectations by up to pounds 25m because of setbacks in the slowing economies of the Asia-Pacific region. Investors will be watching for other evidence of the effect of Asian economic turmoil. US equities have slipped on Asia's decline, as some companies reported lower-than-expected earnings. This, coupled with the misconduct allegations against President Bill Clinton, could drag down US stocks and pull UK shares down in their wake.

Marks and Spencer's Wednesday statement could show a lower-than-expected increase in sales, particularly over Christmas.

Last week's retail sales report, which showed that sales at stores and supermarkets unexpectedly fell 0.1 per cent in December, dashed hopes that holiday shopping had begun slowly and then surged. The drop makes it less likely that interest rates will be raised next month.

Evidence that the British economy is growing sustainably, and that a series of interest-rate rises will not be needed, failed to boost stocks. Economic figures due out next week include M4, Britain's broadest measure of money supply, an industrial trends survey, international trade figures and a consumer credit report.

Wednesday sees the auction of pounds 2bn of new 30-year gilts. The benchmark 10-year government bond yield rose 1 basis point to 6.06 per cent on Friday. The yield on the March short sterling futures contract - a measure of UK interest rate expectations - fell 6 basis points to 7.44 per cent, suggesting investors think official interest rates have peaked.

However, despite this leading indicator, together with economic data making an increase next month less likely, some analysts are not yet confident that the top of the interest-rate cycle has been reached.

"The jury is still out on rates," says Tony Turner, an investment manager with Norwich Union. "We're either at or very near the peak. It's a very fine decision."

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