London Market: Banks face dismay over bailout

UK stocks could decline this week. With banks likely to lead on concern the $3.5bn bailout of Long-Term Capital Management it won't be the last time banks have to help out near-bankrupt hedge funds.

Bonds are seen rising on expectations the US Federal Reserve will cut interest rates, prompting the Bank of England to follow suit.

"The focus will be on the Fed with the expectations for a cut, and that will firm up hopes for a cut in the UK in October," said Steve Andrew, a fixed income analyst at Merrill Lynch.

The FT-SE 100 index see-sawed last week to end 5.4 points higher at 5061.0, with losses in the last two sessions wiping out early gains as Barclays slumped 10 per cent. The FT-SE paper sub-index fell most; the integrated oil index rose most.

"None of the stories have been good for banks," said Tim Gregory, at Gartmore Capital Management. "There'll probably be diabolical weekend press comments and rumours, whether they're unfounded or not."

Barclays, as well as other retail banks, fell most among the financial stocks. The stock has almost halved in value since July. Barclays said its bail-out to Long-Term Capital won't result in a "negative impact on its profit and loss account", unlike European bank UBS, which slumped 19 per cent in two days after it said it will suffer losses of $720m.

Even so, Halifax and other mortgage lenders could extend this week's gains. They aren't exposed to much foreign debt and custom could be boosted if the Bank of England tempts more home-buyers to the market by cutting interest rates before the year-end.

On Friday, the benchmark 9 per cent 10-year UK government bond yield fell 4 basis points to 5.02 per cent. That's 11 basis points higher than the record low of 4.91 per cent it reached earlier in the week, though still down over 45 basis points from a month ago. "If the Fed cut, the Bank of England would be happy to follow," said Gregor Macintosh, at Edinburgh Fund Managers. "The short-end is on fire."

Among shorter-maturity gilts - those most responsive to changes in expectations for official interest rates - the yield on the 8 per cent gilt due 2000 fell 8 basis points to 5.71 per cent.

The Bank of England's Monetary Policy Committee next meets to set rates on 7 and 8 October.

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