London Market: Economic optimism to bolster financials

UK STOCKS are likely to rise in coming days as banks and insurers such as Lloyds TSB and CGU gain on the optimism that reports will show the UK economy is growing without prompting faster inflation.

Retailers such as Boots and Storehouse may also advance on expectations for higher consumer spending as economic growth takes hold.

"We've got away from the boom, bust cycle and that's going to keep inflation rising slowly," said Alan Harris of stockbroker Charles Stanley & Co.

The benchmark FT-SE 100 index has dropped 5 per cent from a high of 6,649.5 points set on 8 July. It gained 91.8 points, or 1.5 per cent, to 6,245.1 on Friday, bringing its gain for the week to 2 per cent.

Mining shares such as Billiton led gainers as mergers among the world's largest aluminum producers prompted speculation of further alliances in the industry.

Stocks are expected to extend gains next week, as a report due on Wednesday is expected to show inflation rose 1.2 per cent in the 12 months to July, down from 1.3 per cent in June, easing concern that interest rates are headed higher any time soon.

"The economy will enjoy a benign period of growth without inflation as the business cyclic begins to turn," said Richard Iley, chief UK economist at ABN Amro in London.

That should help banks and insurers. Lower interest rates boost demand for borrowing and bolster the price of bonds, which typically make up much of the investment portfolios of banks and insurers. Banks seen to gain include Barclays and NatWest.

UK bonds may rise in the coming days, led by notes maturing in five years and less, amid optimism that subdued inflation will lessen need for the Bank of England to raise interest rates in the months ahead.

The report would "help lift the pessimism about rates and keep the short end well underpinned", said Juli Collins-Thompson, a fixed-income analyst at BNP Global Markets Research.

On Friday, gilts erased earlier losses and were little changed, rounding off their best week since 18 June, dragged higher by rallying US debt after a report showed slower than expected inflation in the world's largest economy.

The benchmark 10-year gilt erased a loss of as much as 55p per pounds 100 bond, and was 5p higher at pounds 103.58. Its yield fell one basis point to 5.29 per cent, leaving it 14 basis points lower for the week.