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US question hangs over market

The FT-SE 100 can be expected to flounder this week. Concern that US borrowing costs are headed even higher, muddying the corporate profit picture on both sides of the Atlantic, is to blame.

Activity is likely to be muted as trading is shortened by the bank holiday on Monday. It is also the final week of the tax year, so many brokers are likely to be preoccupied with organising bed-and-breakfast deals to minimise tax liabilities.

With no major UK companies scheduled to report earnings, attention will centre on the US, where several economic reports will be released. These should help to answer the big question on most investors' minds: Is another US rate rise imminent?

Last week, the US Federal Reserve raised overnight lending rates a quarter point to 5.5 per cent, the first increase since January 1996. That sent the yield on the 30-year Treasury bond, a barometer of US inflation expectations, soaring to 7.09 per cent and hammered the Dow Jones Industrial Average.

Figures due for release in Washington include the National Association of Purchasing Management's March survey, Tuesday, February's factory orders, Wednesday, and the March employment report, Friday.

"We'll see very low volumes," said Graham Campbell, investment manager at Edinburgh Fund Managers. "Short term, there's more room for caution."

Drug, oil and other companies that derive a large portion of their profits from the US, such as Glaxo Wellcome and British Petroleum, are expected to follow the US market.

On the bright side, there's Centrica, the former gas marketing arm of British Gas that became a separate company in February. Last week, Centrica rose 11.9 per cent to 63.5p. While that's respectable enough, the share remains well below the 73p price target that SBC Warburg has put on it.

Most shares, however, are probably going to find it tough to post any significant gains.

"When the Fed tightens once, the question immediately becomes 'When and how often will they tighten again?'" said Glen Bickerstaff, a money manager at Transamerica Investment Services. "Until we change that psychology, there will be some interest-rate head wind here for the market."

Domestic attention is likely to focus on politics as the Conservative and Labour Parties will publish their election manifestos. Although it is doubtful that the Labour Party will spell out too much detail about its fiscal plans, if it wins, a summer Budget is expected. Copyright: IOS & Bloomberg