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London Market: Balkan war could limit retailers' gains

UK stocks are likely to be mixed and bonds little changed this week. Dixons and other retailers are expected to rise on hopes the economy is set to grow. Concern over the war in Kosovo may limit gains.

With no major economic reports scheduled for the week ahead, investors will debate the outlook for interest rates and whether recent signs of economic recovery will persuade the Bank of England to keep interest rates steady in May or whether the European Central Bank's bigger-than-expected cut in its benchmark rate will lead to lower rates here. Views are divided.

"Some of worst expectations people held last year are now seen as too negative and the UK economy is performing more strongly," said Tony Hardy, fund manager at Church Commissioners. "There is a likelihood we'll see at least one more cut; we need to catch up with European rates."

"There's no pressure whatsoever from the ECB," said John Praveen, global strategist at Credit Suisse Asset Management. In the UK "there's one more cut at best".

On Friday, the benchmark 10-year gilt yield fell 5 basis points to 4.54 per cent as investors took the view rates will fall again. "It's shortened the time scale for the next rate cut," said Tim Harris, strategist at National Australia Bank. By lowering its benchmark rate 50 basis points to 2.50 percent: "The ECB puts the pressure on the Bank of England by showing how much higher we are. If the Government is committed to joining the euro, rates have got to come down."

While some economists expect at least one more quarter-point cut in the next two to three months, others said the economy is still weak enough to merit benchmark rates falling below 5 per cent. Stephen Mansell at BNP forecasts the benchmark rate will fall to 4.75 per cent by year-end.

The FT-SE 100 index gained 2.82 per cent last week to 6472.8. Banks paced last week's gains in anticipation of the Bank of England's rate cut. The FT-SE banking index rose 8.1 per cent. HSBC Holdings and its rival Standard Chartered were the biggest winners, with HSBC gaining 10.9 per cent and Standard climbing 15.7 per cent. The price of oil rose, which could benefit shares in oil companies further.

Any gains this week could be offset by war in the Balkans. "The longer this situation continues, the more costly it will become to sort out," Hardy said. "That could affect markets across the board."