London Market: Rate worries may offset earnings news

FT-SE 1

UK GILTS could drop this week, extending a decline that has taken them to their lowest levels since September and stocks may decline as concern that interest rates will rise on both sides of the Atlantic offsets any encouragement from a slew of first-half earnings announcements.

Banks HSBC, National Westminster, Standard Chartered and Barclays, all report earnings this week. And all of them might fall if interest rate concern persists.

The FT-SE 100 index on Friday rose 1.9 per cent, to 6,231.9, up 0.4 per cent for the week and barely denting its 5.4 per cent slump the week before. "In the short term, interest-rate fears will override earnings upgrades," said Jane Coffey at Morley Fund Management.

A report on Friday showed the economy grew in the second quarter at its fastest pace in nearly a year, raising speculation that the Bank of England will raise rates. Anticipation of higher rates helped push yields on the benchmark government bond up 11 basis points to a 10-month high of 5.32 per cent. "The biggest concern right now is interest rates," said Bill Thomson, a fund manager at PH Pope & Son.

"The focus will be on the Monetary Policy Committee," said Nick Stamenkovic, a bond strategist at IDEA Global. "No one expects a change, but people are increasingly nervous that rates will go up sooner rather than later. The market remains under pressure, and any signs the recovery is picking up pace will push up yields."

Attention will focus on the banks. Lloyds TSB, Europe's most profitable bank, reported first-half profit rose a better than expected 43 per cent last week. Its competitors are not expected to do as well. "Lloyds is in a class apart, partly because of the quality of its management," Mr Thomson said. "Barclays and NatWest are struggling and the recovery of the Far East banks is still a little patchy."

HSBC, which get about half its earnings from Asia, is likely to say first- half profit fell 10 per cent from a year earlier. Standard Chartered, which earns nearly 60 per cent of profit in Asia, is expected to report earnings per share dropped 32 per cent.

Barclays is expected to post a 32 per cent drop in first-half earnings per share, hurt by a pounds 200m charge for reducing staff. NatWest is expected to report earnings per share were unchanged, as the bank is installing new cash and check processing systems and must pay to run two systems until the new one is fully functional.