LONDON MARKET

Hopes for growth boost cyclical stocks

UK STOCKS are likely to be mixed. Hopes for faster economic growth worldwide could prompt investors to buy Rio Tinto, BP Amoco and other stocks that stand to benefit from rising commodity prices. Banks may decline as the prospects for a stronger UK economy could delay further interest rate cuts.

"Anticipation of better earnings is driving the share price [of so-called cyclical stocks]," said Simon Melluish, manager at Gartmore Investment Management. "This sector is relatively cheap compared with their earnings prospects."

The FT-SE 100 index rose to 6,552.2 points for a gain on the week of 1.9 per cent. The oil and gas sub-index of the FT-SE 350 led gains, adding 7.8 per cent. Rio Tinto, the mining company, paced gains, climbing 8.2 per cent in four trading sessions.

Gilts, together with Lloyds TSB, Barclays and other banks, could decline if Bank of England leaves interest rates unchanged. "The market expects rates to stay on hold," said Simon Penn, an economist with MCM YieldWatch. "The figures are roughly 80 to 20 per cent for no change. That means around 20 per cent of investors out there will be disappointed, so it's possible for the market to move lower."

The central bank's monthly Monetary Policy Committee meeting begins on Wednesday and ends on Thursday, when the rate decision is announced. Most economists expect interest rates to be unchanged, although a few said the bank will trim borrowing costs another 25 basis points.

The bank is more likely to wait until June before it makes a further reduction, in order to gather more information on the health of the UK's economic recovery, said Mr Penn.

Still, some investors said there is room for the MPC to cut in May. "The MPC tends to move more aggressively at the end of each quarter," said Andrew Cope, a fund manager at HSBC Asset Management. Policy makers may decide recent improvement in UK economic growth is outweighed by the continuing strength of the pound, he said.

UK bonds fell last week, posting the largest decline of the week on Friday, to leave the yield up 6 basis points at 4.61 per cent. Gilts dropped with Treasuries on concern that US economic growth may fuel inflation, preventing central banks around the world from keeping interest rates low.

Oil shares have led gains on hopes for more mergers in the industry and as crude oil climbed to a 16-month high.