London market: FTSE 100 - Get set for a cold Christmas

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The Independent Online
Gilts are expected to hold gains that drove yields to a seven-week low last week as investors debate how soon and by how much the Bank of England will cut interest rates. "There's a reasonable chance of another cut" next month, said Andrew Snowball at Julius Baer Investments. Still, he said, "a lot is already priced in," so he doubts gilts will gain much before the next rate-setting meeting.

The interest rate futures market suggests traders and investors are split on whether there will be a rate cut next month. Economists are more dubious with just four out of 18 surveyed expecting one. "The outlook for manufacturing is pretty miserable," said Adam Cole, economist at HSBC Markets. Even so, he said, "on balance the Bank of England will hold out" until January to cut rates again, and then trim the benchmark rate to 5 per cent by the end of next year.

Stocks are expected to fall, easing from 17-week highs notched last week. Great Universal Stores and Allders are likely to say sales are slowing as the Christmas shopping period begins. Falling sales in pubs and hotels could hurt Bass and Greene King, which report earnings this week.

Allders, the department store chain, and GUS, the home-shopping retailer, could suffer from slowing consumer demand. Last week, government figures showed that consumer spending fell in October and the annual sales growth rate slipped to the lowest since January 1996.

"Consumer demand is a problem," said Simon Smith, manager at Capel Cure Sharp. "The critical time for retailers is Christmas," and sales "won't be brilliant".

The FT-SE 100 index rose 2.2 per cent in the week to close at 5,844.2 on Friday. The FT Insurance Index led gains, up 7.6 per cent, while Oil Exploration fell 10.76 per cent. The benchmark 9 per cent 10-year gilt yield is at 4.74 per cent, its lowest since 7 October.

Verdict Research said retailers faced the worst Christmas in decades. Even if they make dramatic price cuts, shoppers still won't be induced to spend.

Mergers and takeovers are expected to dominate news in the oil, chemicals, financial and drugs industries again. Some investors are growing suspicious of the gains that mergers and speculation about mergers are causing.

"I'm deeply sceptical of the market rally. There's not a willingness to actually look at the numbers - the mergers are in the forefront of everyone's minds," said Tom Eyre at BWD Rensburgd. "There's going to have to be some massive downgrades next year."