LONDON MARKET: Retailers gain from economic optimism

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UK RETAILERS and house builders may lead gains in stocks this week on optimism that the economy is growing, boosting consumer spending. Dixons Group could rise as Britain's first free internet service provider reports fiscal 1999 profit.

"The outlook for the UK is very strong," said Gill Leats, fund manager at Majedie Investment. She favours "anything that benefits from an increase in consumer confidence".

Gilts are likely to remain little changed, as signs that the economy is on the road to recovery persuade the Bank of England to refrain from lowering interest rates further. "The market already knows the grass roots of the economy have been nourished enough, so gilts will be fairly insensitive to the decision," said Stewart Newnham, strategist at State Street Bank. Policy makers will take into account the "distinct signs of a growth rebound. We are at - or very close to - the bottom of the easing cycle", he said.

No-one is looking for a rate increase yet. "I don't think UK rates are going to go up this year," said John Shelley, senior fund manager at Aberdeen Asset Management.

Gilts rallied last week from their lowest levels this year, as yields above 5.0 per cent tempted investors into buying government debt. The benchmark 10-year gilt yield fell 8 basis points to 5.07 per cent.

Companies such as Great Universal Stores, the mail order company, and retailers Boots and Next could all gain. Building and construction companies may also rise. Halifax said on Friday that house prices rose 1.8 per cent in June, boosted by cheaper borrowing costs and rising confidence. That is likely to boost house builders and building products makers, such as RMC , Barratt Developments, George Wimpey and Beazer.

On Friday, the FT-SE 100 index gained three points, or 0.05 per cent, to 6,491.9, bringing its gains last week to 0.9 per cent. The broader FT-SE 350 index rose 0.9 per cent on the week.

The FT-SE Information Technology index led the week's gains, and Arm Holdings spearheaded the index's 19.2 per cent ascent. That was after US technology stocks rose, fuelled by optimism the US Federal Reserve is no longer leaning toward raising interest rates. "The market probably has got a little further to go," said Ms Leats.

Technology and financial stocks may gain for a second week on hopes that interest rates in Britain and the US won't rise soon.