London Market: Reports expected to be 'gilt positive'

UK STOCKS and bonds are likely to gain this week as a batch of economic reports bolster expectations for lower interest rates, though the Bank of England will probably hold rates steady until April. Those reports include figures for economic growth, trade and a survey of industrial trends.

The figures "will be gilt-positive", said David Coleman, chief economist at CIBC Wood Gundy. The fourth-quarter gross domestic product "will be revised down and the CBI will be weaker", he said, referring to the CBI's February industry survey.

Analysts expect the Government to revise down its fourth-quarter growth estimate to 0.1 per cent or zero per cent from an initial 0.2 per cent growth estimate. At 0.2 per cent, economic growth was its slowest in six years. On Friday, the benchmark government bond yield fell 3 basis points to 4.37 per cent.

Stock gains are likely to be led by National Westminster Bank and other financial companies. "One should be looking at the banks because retail banking will benefit. People will be surprised at the growth they see in 1999. The investment theme is about being close to the consumer," said Michael Browne, head of European equity strategy at Chase Asset Management.

NatWest shares gained 4 per cent last week, boosted by earnings of rivals Lloyds TSB and Barclays, whose better than expected retail banking sales more than offset heavier losses on loans overseas. "This corporate earnings season is providing us with one or two positive surprises," Mr Browne said. The FT-SE 100 index fell 0.7 per cent to 6031.2 on Friday, paring a 2.1 per cent gain earlier in the week.

Some of the biggest insurers, such as Prudential Corporation and CGU, will release their 1998 profits. Cadbury Schweppes reports earnings on Wednesday. British Aerospace reports on Thursday. The shares dropped 4.2 per cent Thursday following a report that it will see a suspension of payments from Saudi Arabia for the so-called Al Yamamah defence contract. While BAe and the Ministry of Defence denied the report, the shares fell another 2.4 per cent Friday to 402p.

Stronger than expected employment and retail sales reports last week raised concern that the Bank of England will pause next month after five consecutive months of interest rate cuts. "It'll be a close call, but the Bank won't cut [next month]," Mr Coleman said. "It would be unwise to put too much weight behind any set of numbers."