"The market has gone up too far, too fast," said Peter Hewitt, head of investment research at Murray Johnstone. "If telecom merger talks fall through, the shares will be highly overvalued." He doesn't intend to buy any telecom stocks in the near future.
The FT-SE 100 index rose 4.5 per cent to 6,147.2 last week. The telecommunications sub-index led gains, jumping 12 per cent, as Cable & Wireless rose 20 per cent on speculation it may be the target of a takeover bid by Deutsche Telekom. Vodafone rallied on speculation it may bid for the US-based AirTouch Communications, rising 9 per cent to 1,064.5 over the week.
Kingfisher fell 3.75 per cent on Friday, ahead of Tuesday's trading statement which is expected to reveal bad news. In December, the company said sales growth had slowed towards the end of 1998. Trading figures at Great Universal Stores are also likely to look "very tough", Mr Hewitt said. On 3 December, the mail-order shopping operator said first-half profit fell 29 per cent amid slowing demand.
Gilts are expected to be little changed, holding gains that pushed yields to record lows, as a series of economic reports bolster expectations for interest-rate cuts. They "will support the view that rates need to be much lower to limit the likely recession" in the UK economy, said Tim Harris, a market strategist at National Australia Bank. Gilts will also get some support from "a continuation of the positive mood in European bonds", he said.
Reports on Monday are expected to show a further decline in manufacturing output and producer price inflation. A labour market report on Wednesday will probably show another rise in unemployment. Also due is a survey of retail sales on Tuesday.
The benchmark 10-year gilt yield fell to 4.25 per cent on Friday, matching a record low reached on 4 January. The Bank of England cut interest rates by a quarter point to 6 per cent, its fourth reduction in as many months, in response to a slowing economy. Many economists expect rates will fall further in coming months, as growth slows and inflation remains subdued.
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