London Market: The gloom is set to deepen

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The Independent Online
UK shares are expected to extend losses this week, following the worst week in nearly 11 years for the benchmark index, as concern monuts about slowing global growth. A potential cut in interest rates may not be enough to soothe investors.

The FT-SE 100 index tumbled 6.12 per cent last week, its biggest weekly drop since November 1987. Barclays and Lloyds TSB led declines on concern that more banks will reveal losses from collapsing hedge funds and emerging market turmoil. The FT-SE 100 fell 157.8 points, or 3.22 per cent, on Friday to close at 4,750.4 - an 11-month low.

Spreading recession in Asia and the threat of debt defaults from emerging markets has hammered equities globally in the last few weeks. A cut in interest rates from the US Federal Reserve by a quarter point on Tuesday failed to lift US stocks, and a cut in rates from the Bank of England when it meets this week could be met with a similar response.

"People are more worried about the demand situation than they are about interest rates coming down. A cut in rates will boost demand in about 18 months' time, but people are worried about what's going to happen in the interim," said Vanessa James, fund manager for Legal & General. Still, "the more people that cut interest rates in developed countries has got to be positive," she added.

Barclays dropped 15.6 per cent last week and Lloyds dropped 9.8 per cent. Among companies with international operations, Unilever, the world's largest consumer goods maker, fell 6.3 per cent on concern about slowing global growth.

Gilts are expected to hold recent gains, buoyed by optimism that interest rates will soon fall. Gilts "will remain well-bid because the market has grown very bullish on the prospect of a rate cut before too long," said Phil Tyson, market strategist at HSBC Markets. "We don't expect the Bank to ease this time around, but there's a feeling that it's only a matter of time" before rates fall.

While only four of 21 economists surveyed expect rates to be cut on Thursday, 18 see lower rates by the end of the year. Analysts said a series of economic reports due this week - including money supply growth, industrial production and surveys on service industry activity and retail sales - aren't likely to derail those hopes.

The benchmark 9 per cent 10-year UK government yield fell 40 basis points last week to 4.62 per cent.

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