Full steam ahead for London shares

Tomorrow, UK stocks look ready to resume the record-setting pace of last week. The question is: can they keep it up?

Two economic reports might cause a squall or two: the producer price index tomorrow, and the industrial production report on Wednesday. If the market can weather these, the rest of the week should be plain sailing.

The danger is that the PPI will show inflationary pressures building up. Higher interest rates would follow and corporate profits would shrink. Failing that, declining industrial output could suggest the strong pound is raising costs for manufacturers.

In fact, neither is likely. Expectations are that sterling's strength forced down producer input prices last month by 0.2 per cent compared with the month before. That would put the decline from February last year at 6.1 per cent. When the prices factories pay for raw materials fall more than 6 per cent in a year, inflation is not much of a threat.

Similarly, predictions for output are that it will show a 0.2 per cent gain in January from December and a 1.4 per cent gain from January a year ago - the kind of steady, sustainable growth that keeps rates low and earnings respectable.

Even if both reports prove discouraging, corporate results could restore some optimism. Last week stocks kept rising as a series of companies reported profits that met or exceeded projections. This week IMI, Orange, Psion, Zeneca, Reed International, United Biscuits, Zeneca and Legal & General report, among others.

The example set by US stocks should help as well. Just after trading closed on the London Stock Exchange on Friday, the Dow climbed as high as 7,018.59. It gave back some of these gains but still managed to end the day at 7,000.89, an advance of 56.19.

What is most encouraging about the US rise is its foundation. The prospect is for steady growth with little inflation - the same outlook as for Britain.

By contrast, the big European markets can at best look forward to slowly improving economies. Although France's CAC 40 index turned in its best performance in eight weeks, few people expect it to maintain that pace while the economy remains so sluggish.

Much the same is true in Germany. A weak mark against the dollar boosted shares in exporters and helped the DAX index to set four straight records last week, but some analysts are beginning to wonder just how long a stock market rally can depend on a declining currency.

LARRY KING Copyright: IOS & Bloomberg