London market: Gains expected as pound slides

UK stocks are expected to gain, with industrial companies such as BTP and Siebe benefiting from a slide in the value of the pound which will improve exporters' profits. Gilts should rise as economic reports and anecdotal evidence are expected to boost hopes that interest rates won't rise again.

Manufacturing companies, hurt last year as the strength of sterling cut the value of foreign sales, will also be underpinned by expectations that borrowing costs have peaked after the Bank of England left rates unchanged last week for a sixth consecutive month.

The FT-SE 100 index fell 40.5 points last week to 5,969.8. The FT-SE 250 index, meanwhile, reached a new record high of 5,741.1, boosted by engineering stocks. The FT-SE Engineering sub-index advanced 6.6 per cent. The benchmark 7.25 per cent 10-year UK government bond yield fell on Friday by two basis points to 5.86 per cent.

"Sterling appears to have peaked, and the outlook is improving greatly" for engineers and industrials, said Simon Smith, a fund manager at Albert E Sharp. "It's the start of an upturn after what's been a difficult time for them."

The key focus for investors will be the Bank of England's quarterly inflation report, released Wednesday. It's likely to show that the central bank expects inflation to meet the Government's 2.5 per cent target over a two-year time horizon.

"I'm expecting a fairly gilt-positive set of reports next week," said Steve Andrew, fixed-income analyst at Merrill Lynch. "The inflation report will be the key, and it'll probably show inflation on target, though the usual risk warnings will be there." Also on Wednesday, the minutes of the April Monetary Policy Committee meeting will be published. They're expected to show the eight-member panel moved to a five to three majority in favour of unchanged rates last month, from a four-four split the previous month.

Among economic reports, output and producer price inflation is scheduled for tomorrow, a survey of retail sales is due on Tuesday and an employment report is expected on Wednesday.

Analysts are focusing on the timing of the first cut in interest rates. Some investors say expectations for rates to fall this year are too optimistic. That's because the strength of sterling has been a key reason for the slowdown in the economy and inflation, and the weakening pound will limit the scope for cuts.

"I think rates have peaked in the UK,"said Mr Smith at Albert E Sharp. "If anything, European interest rates may rise, and that may mean rates in the UK take a little longer to come down."