London Market: Investors catch the drugs bug

UK STOCKS are likely to gain in coming days; HSBC Holdings and CGU will lead financial-service shares higher in step with bonds, on optimism that Thursday's Bank of England rate increase was the last for a while.

BP Amoco, Europe's second-biggest oil company, is expected to report a 62 per cent leap in its third- quarter profits.

"I'm getting more interested in insurer and bank shares,'' said Gilles Guibout, who helps manage about FF5bn (pounds 490m) in equities at the Paris branch of San Paolo Asset Management.

UK bonds rallied for the eighth day on Friday and will probably send financial services higher. Banks and insurers tend to hold large portfolios of fixed-income securities - good news for companies such as Lloyds TSB, Prudential and Norwich Union. The prospect of stable rates also encourages borrowing, boosting revenue for banks.

The FT-SE 100 index climbed 1.6 per cent last week, its third week of gains in a row. Drugs companies led the week's rally on optimism that there will be a merger in the industry. SmithKline Beecham, Europe's fourth-biggest drugs company, surged 12 per cent over the week and Glaxo Wellcome jumped 3.3 per cent.

Pharmaceutical companies could ex-tend those gains as investors speculate that they will be forced to merge to compete with rivals worldwide. Warner-Lambert rejected a takeover bid from Pfizer last week, saying it will proceed with plans to merge with American Home Products and form the world's biggest drugs company.

"We've had the big merger story in America, so we're going to have to get ourselves a major UK pharmaceutical company,'' said Simon Smith, who helps manage about pounds 10bn in equities at Capel Cure Sharp.

BP Amoco may gain too. Third-quarter profit probably rose 62 per cent to $1.87bn (pounds 1.15bn), according to a Bloomberg News survey of seven analysts. Benchmark Brent crude oil prices averaged $20.69 a barrel during the third quarter, 59 per cent higher than the price a year earlier.

"The key driver will be the improvement in the oil price,'' said Alan Sinclair, an analyst at Charterhouse Securities.

British Airways is also slated to post earnings. BA could post anything between a loss of pounds 35m and a profit of pounds 35m, according to analysts polled by Bloomberg News. Last year, BA earned pounds 240m in the quarter.