London Market: Little good news on the horizon

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UK STOCKS are expected to fall amid expectations British American Tobacco, Colt Telecom Group and other companies will report earnings lower than last year's.

"There is very little good news on the upside," said Bill Thomson, fund manager at PH Pope & Son. Declining consumer demand could eat into profits, he said. "Spending is slowing down, so anything that's not up to scratch is going to fall."

The FT-SE 100 index on Friday lost 12.8 points, or 0.24 percent, to 5217.1, its losses led by banks. Still, the index gained 1.64 per cent last week.

Glaxo Wellcome and other drug makers, including SmithKline Beecham, led the week's gains. The FT-SE Pharmaceuticals index rose 8 per cent after its Swiss counterpart, Novartis, reported earnings almost twice those expected, boosting hopes for similar performances by British competitors. Earlier last week, SmithKline posted better-than-expected earnings.

UK banks fell on Friday amid concern that Japan's banks might not take up public funds that the government set aside to ease their lending crisis, which threatens debts owed to foreign banks.

Lloyds TSB Group, Barclays and other banks may reverse their losses this week, as investors view their shares as cheap compared with earnings prospects.

Gilts are expected to be mixed, with short-dated gilts buoyed by hopes that interest rates will be cut next month. Longer-dated bonds could fall as speculative investments are unwound.

Concern about selling by hedge funds helped to push 30-year gilt yields up 15 basis points last week. They're now almost 80 basis points higher than the 30-year lows reached earlier this month. On Friday the benchmark 9 per cent 10-year gilt fell and its yield rose 9 basis points to 5.11 per cent. Reports this week on international trade, consumer credit and a survey of manufacturing industry are likely to have little effect on gilt prices.

A report on second-quarter GDP last week showed the economy isn't slowing as much as many expected, even though there is statistical and anecdotal evidence of stagnation in manufacturing.

"I think everyone's finding the data very hard to believe," said Brian Hilliard, economist at Societe Generale. "The figures will remove the urgency for the MPC to make any deep, early cuts." The figures make it less likely the central bank will cut its benchmark rate by more than quarter of a point in November.