London Market: Brazilian effect bears down on shares

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UK stocks may fall this week, led by HSBC Holdings and other banks on concern that the recent devaluation in Brazil could stifle growth in emerging markets worldwide, forcing banks to write off more bad loans. Robust full-year results expected from Northern Rock could limit losses.

"The markets are obviously very concerned about the level of devaluation in Brazil and the fact that it hasn't stabilised the market, the economy or even the government," said Roger Hornett, a director at SG Securities.

HSBC may extend its 3 per cent decline last week, as Brazil's currency weakens against the dollar. The real has fallen 29 per cent since it was allowed to devalue on 13 January. In 1997, HSBC bought HSBC Bamerindus from the Brazilian government. HSBC, which makes 54 per cent of its profit in Asia, is expected to more than double the amount of money set aside for bad loans in 1998 as slowing Asian economies hindered clients' ability to repay debt.

Lloyds TSB Group, which has offices in Brazil, Argentina and seven other Latin American countries, may also slide. Its shares fell 3 per cent on Friday as Brazil's Bovespa benchmark index dropped as much as 3 per cent.

The FT-SE 100 fell 1.34 per cent to 5,861.2 points last week. British Aerospace was the biggest decliner, shedding 19 per cent after it said it would buy General Electric's Marconi defence unit for pounds 7.76m, a price some investors considered too high.

Northern Rock may help to offset losses. The mortgage lender is slated to post full-year earnings on Wednesday. Analysts expect a 9.5 per cent rise in earnings per share from the 27.9p reported last year. Northern Rock is the first UK bank to release 1998 earnings.

Gilts are are expected to extend recent gains on expectations that a slowing economy and subdued inflation will prompt further interest rate cuts. "Genuine fundamental forces are now at play in the gilt market, and with the economy slowing and inflation no threat, rates are on the way down," said Tim Harris, a market strategist at National Australia Bank. "A February rate cut is pretty much in the bag, and the front end of the gilt market is the place to be," he said.

On Friday bonds rose for a third day, driving yields to record lows, as a report showing the economy slowed less than expected did little to change the outlook for lower interest rates. The yield on the benchmark 9 per cent 10-year gilt fell six basis points to 4.14 per cent.