London market: Asian 'catastrophe' to hit stocks

UK stocks are expected to decline this week as a strong pound, slowing economic growth and Asia's crisis threaten to crimp corporate profit growth. HSBC Holdings and Standard Chartered, which derive much of their earnings from Asia, are likely to be the barometer for the market.

"I'm not bullish," said Peter Hewitt, head of UK research at Murray Johnstone. "I'm very concerned about earnings. There is a clear impact from the Far East."

The benchmark FT-SE 100 index gained 2.25 per cent to 5,877.4 last week, bolstered by the telecommunications index, which rallied 8.7 per cent to 4,488.5. AT&T Corp has said it plans to make an international purchase and speculation is centred on BT, analysts said.

Many other stocks are likely to be depressed by concern that Asia's economic crisis is set to snowball, spreading from Japan to China and Hong Kong. "I don't think the Asia crisis has played out yet," said Tony Hardy, investment manager at Church Commissioners. "With 40 per cent of Japan's exports going to Asia, this is a catastrophe, not a blip."

Concern over Asia is being compounded by the possibility of an economic slowdown in the UK and the strength of the pound, which is depressing exporters such as British Steel and TI Group. "There is no doubt that the domestic UK economy is slowing and in some areas quite sharply," said Murray Johnstone's Mr Hewitt.

"The chances of a hard landing are increasing."

Gilts are seen as little changed, as economic reports likely to show the economy slowing are offset by concern about interest rates. Among the economic reports expected this week are bulletins on narrow money supply growth, consumer credit, a survey of retail sales, and purchasing managers' surveys on both manufacturing and service industry activity.

Gilts "look set for a pretty neutral week", said Tim Harris at National Australia Bank.

"The data will show a weakening economy, but the Bank of England's objective is getting inflation down and for that reason I'd be surprised if we don't see a rate rise in July."

That concern will be enough to deter investors from buying gilts, added Mr Harris.

The benchmark 7.25 per cent 10-year government bond yield rose two basis points to 5.87 percent on Friday, down six basis points in the week.

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