London market: Mining and construction take centre stage

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The Independent Online
UK stocks are expected to rise, led by mining and construction stocks, amid evidence that world economic growth is gathering pace, boosting demand for raw materials needed for higher production.

Optimism for growth was triggered after reports from Japan and Germany indicated economies expanding faster than expected. Thursday's quarter- point cut in interest rates to 5 per cent by the Bank of England was also designed to boost UK growth as inflation stays steady.

"The underlying message is that the outlook for the global economy has improved," said Paul O'Connor, a UK equity strategist at Credit Suisse First Boston. He recommends mining and oil exploration stocks.

On Friday the UK's FT-SE 100 index rose 81.4 points, or 1.3 per cent, to 6,484.8 - its highest closing level in six weeks - taking its gain for the week to 1.9 per cent. The FT-SE All-Share index advanced 1.1 per cent, for a gain of 1.8 per cent.

Mining stocks may extend advances in coming days after the FT-SE 350 mining index climbed 12.2 per cent last week on hopes that an expanding world economy will boost demand for copper, aluminium, zinc and other metals used in production.

Rio Tinto, the world's biggest mining company, which rose 14 per cent last week, and Billiton, the UK's second-biggest miner, are seen leading the gains. Lonmin, the Anglo-African company formerly known as Lonrho, also rated highly on "buy" lists.

Construction companies may climb, led by cement maker RMC and building products supplier Hanson. The FT-SE construction index climbed 3.6 per cent last week.

UK bond yields may rise over concern that accelerating global growth will fuel inflation. That may prompt the US Federal Reserve to raise interest rates, pushing Treasury bond yields higher. "The way that the UK bond market is trading at the moment, it is just taking direction from the treasuries," said Eddie Middleton, of Britannia Investment Management. "We need some stabilisation in Treasury bonds before this can end."

The yield on the benchmark 10-year UK bond rose 13 basis points last week to 5.09 per cent, near its highest level since October. Higher yields mean lower bond prices.

"We are in a bear market," said Andrew Roberts, a bond strategist at Merrill Lynch, one of the 16 firms dealing with the UK Debt Management Office. There's a "trend at the moment of improving growth in all the core global markets", he said.