London Market: Stocks to rise on rate hopes

STOCKS are expected to rise this week, with Lloyds/TSB Group, Barclays and other banks likely to gain on optimism that UK policy makers will follow European central banks' lead and cut interest rates. Gilts are expected to be little changed, holding gains that drove yields to an eight-week low in the last week.

Expectations that the central bank's Monetary Policy Committee will trim rates on Thursday were boosted after Germany led a co-ordinated rate-cut among European countries to combat slowing growth. Recent UK reports have indicated that British economic growth is already slowing.

"The pan-European rate cut has clearly enlivened hopes for a rate cut at the next MPC meeting," said Kevin Colglazier, at Global Asset Management. Gilt prices reflect expectations for "a fair amount of rate cuts", which the Bank of England will deliver, he said.

In the past week the FT-SE 100 Index fell 262.3 points to 5,581.9, the worst decline over a five-day period since the start of October: it rose 15.8 points on Friday.

Through the week, the FT Integrated Oil index slipped 10.75 per cent and led percentage decliners. The benchmark 9 per cent 10-year gilt yield closed on Friday at 4.63 per cent, its lowest since 5 October.

British Petroleum fell 6 per cent, hurt by crude oil prices hovering near 12-year lows even as the biggest takeover yet seen in the industry, Exxon's $82.8bn (pounds 50bn) purchase of Mobil lifted some other oil stocks. Traders said Exxon's agreement overshadows BP's own proposed $63.8bn takeover of Amoco.

Optimism for lower UK rates is reflected in the interest- rate futures market. The implied yield on the December sterling interest-rate futures con- tract fell 19 basis points in the last two days to 6.54 per cent.

The Bank of England has already cut rates twice since the start of October by 75 basis points in a bid to temper the economic slowdown - emphasised last week by two surveys showing that service industry activity shrank in November for the first time since July 1996 and that retailer's confidence posted its biggest fall in 15 years. British Retail Consortium figures this week could reinforce the picture of falling demand. Weaker consumer demand means the threat of accelerating inflation is diminishing.

"Economic activity seems to be weakening by the hour," said Kevin Adams, gilts strategist at Barclays Capital. He expects the yield on the benchmark bond to fall to "the low 4 per cents over the next six months."

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