London Market: Rate hopes buoy the market

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The Independent Online
UK STOCKS are likely to rise this week, led by Lloyds TSB and other banks, as well as Diageo, Siebe and other exporters on optimism that the Bank of England will cut interest rates. UK bonds are expected to be little changed.

"A quarter-point cut is a virtual certainty, but that's so well priced into gilts I wouldn't expect a great deal from the markets before the decision," said Steve Andrew, a fixed-income analyst at Merrill Lynch.

The Bank of England's Monetary Policy Committee will meet on Wednesday and Thursday, after which the Bank is expected to cut the base rate to 7.00 per cent from 7.25 per cent.

Lower rates make corporate borrowing cheaper and weakens the pound as foreign investors seek better returns outside the UK. That makes UK companies more competitive abroad and increases foreign sales when they're converted back into sterling.

The FT-SE 100 index on Friday rose 79.9 points, or 1.49 per cent to 5,438.4, its highest since 26 August and its fourth gain last week. Almost four stocks rose for every one that fell. The index has rallied 16 per cent since touching a low for the year on 5 October. It gained 4.2 per cent last week.

BP and Shell Transport & Trading, Europe's two biggest publicly traded oil companies, could limit gains this week, when both announce third-quarter earnings. Both are suffering from oil prices at 10-year lows, a phenomenon that cut third-quarter profits at US oil companies by 40 per cent. Brent crude prices have fallen 30 per cent from a year ago.

Telecoms shares led the FT-SE higher last week, as Vodafone and British Telecommunications rose 5.6 per cent and 5.5 per cent, respectively, on optimism they will be sheltered from a global economic slowdown because they make most of their profit in the UK. The FT-SE Telecommunications sub-index gained 13 per cent to 4,514.8.

"The telecoms sector is surely a long-term mine of growth," said Isabelle Merton, who helps oversee $5bn (pounds 2.99bn) in assets for ABN Amro Asset Management. "Life is changing and these companies are at the centre of it."

Siebe and other engineering companies could continue to notch up gains after the mark gained against the pound in the last month. Siebe makes more than a third of its sales in Europe.

Likewise, Diageo, the world's biggest liquor company, could gain as foreign sales translate into higher profits in the UK if the pound weakens. Copyright: IOS & Bloomberg