London Market: FT-SE 100 - Outlook gloomy despite cut

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UK STOCKS are likely to fall, with British Airways, British Energy and PowerGen posting lacklustre earnings. Concern that slowing world economies will damp corporate profits won't be assuaged by last week's interest rate cut."We're not out of the woods yet," said Tristan George, equities manager at Carr Sheppards. "It's going to take strong sentiment in the face of the continuing disappointing earnings results."

Gilts are expected to be little changed, with investors unwilling to place big bets before the Bank of England publishes its quarterly inflation report on Wednesday, which is expected to boost hopes of lower interest rates.

"There's little incentive for most people to get involved in the market either way," said Tim Harris, a market strategist at National Australia Bank. Still, the inflation report "is likely to highlight the case for lower rates soon".

In addition, a report on producer price inflation and a survey of retail sales in October are also likely to bolster expectations that interest rates will fall further.

On Friday, the yield on the benchmark gilt rose 10 basis points to 5.12 per cent. The Bank of England's attempt to ward off recession will help stocks more than bonds, according to John McNeill, a market strategist at Sutherlands Stockbrokers. Monetary policy "will be set to sustain growth, and equities should outperform bonds" in that environment, he said.

The FT-SE 100 index last week rose 1 per cent to 5,491.0 making a gain of 18 per cent since 5 October, after plunging 25 per cent in the 10 weeks before then. Banks were the biggest gainers last week, with the FT-SE banking index up 3.36 per cent.

Investors don't expect banks' advance to continue. "The rate cut sends out mixed messages," said Mr George. "Either it says the Bank wants to send a good message to manufacturers suffering from the strong pound, or it says the economy is slowing more that we thought."

Financial service companies were boosted on Friday by speculation that Halifax and the Prudential could merge to create Britain's third largest financial company with a market capitalisation of some pounds 37bn.

"There have been so many of these rumours in the past - I wouldn't put too much into it," said Simon Smith, equities manager at Capel Cure Sharp. Copyright: IOS & Bloomberg