"If we come through this difficult environment, we'll be in a period of steady growth with low inflation," said Robert Talbut, head of UK equities at Royal & Sun Alliance. The outlook for earnings has improved, with the pound falling against international currencies, interest rates on hold and buoyant consumer demand driving sales. The FT-SE 100 index rose 55.5 points on Friday to 5455, although the index dropped 3.97 per cent on the week.
Financial stocks could gain. Declines in the past few days by the leading retail banks on concern about bad debts in Asia are figured into prices. Lloyds TSB and Barclays, along with HSBC Holdings and Standard Chartered, which both rely on Asia for about half their profits, could all claw back some recent losses.
"We would focus on the financials," said Mr Talbut. "They look extremely good value and the theme of industry consolidation has not gone away."
On Tuesday BP announced plans to buy Amoco for $53bn (pounds 32bn), which has raised speculation of more link-ups in an industry not previously considered as one where mergers and acquisitions were set to take place. This week oil traders will be watching developments in Saudi Arabia, the world's biggest oil exporter, which announced cuts in volume of crude oil available for collection by customers. That could boost the price of oil, which has languished near 10-year lows for weeks.
"If you could get a stabilisation in the oil price BP would be worth going for," said Mr Talbut. Still, "the oil price can still scupper anything the companies can do themselves." He said independent oil explorers Lasmo and Enterprise Oil could be bid targets.
Gilts are expected to be little changed as a slew of economic reports leave intact expectations that interest rates have peaked but will not be cut soon. "Though we have a stream of economic data this week, we don't expect any of it to be spectacularly weak," said Philip Shaw, chief economist at Investec."Gilts will probably stay at these levels."
Reports are expected to show inflation slowing in July but still above the Government's 2.5 per cent target. Only a modest rebound in July retail sales is forecast.