"I'd expect we'll see some consolidation in gilts next week," said Steve Andrew, a fixed-income analyst at Merrill Lynch. "The market has convinced itself rates will go up again soon, but then again it's fallen so far this week that the downside looks limited."
Evidence that inflation in the UK is still accelerating led to expectations that interest rates may rise, pushing the pound on Friday to a two-month high against both the dollar and the deutschmark, the currencies of Britain's two biggest export markets. "Rising rates have a lagged impact, and one effect is to boost the currency," said Mike Grimble, investment strategist at Norwich Union. "You can't rule out another [rate] hike." Gilt yields are at their highest in more than a month at 5.93 per cent. The FT-SE 100 was little changed over the week at 5,748.1. Stocks oscillated between concern and relief over Asia's prospects, with exporters facing the biggest declines. The FT-SE 250 index, laden with exporters, dropped 4.48 per cent to 5,598.5.
"Those who think the pound is weak should be shot,'' said Logie Cassells, a fund manager at Capel-Cure Myers Capital Management. "I think we've seen the end to the outperformance of the 250 and small caps."
Some stock investors were looking for value in sectors that aren't exposed to the pound's fluctuations. "Go for companies that can deliver growth in a low-inflation environment," said Mr Cassells, singling out bus companies such as Stagecoach and media companies such as WPP Group.
Investors will also be closely watching oil prices as speculation mounts that Opec will agree to more production cuts at its summer meeting this week. Crude oil futures rose 1.96 per cent to $13.03 a barrel on Friday. Still, BP and Shell, Britain's largest oil companies, both fell on the week. "The oil sector is under the cosh," said Mr Cassells. "It is heading for a final lurch downwards.''
The economic reports due this week, including the trade balance and a survey of industry activity, aren't expected to influence the market.
Copyright: IOS & Bloomberg