City's lie-in will not be restful

The City has been treated to a series of four-day weeks, but the holidays do not seem to have done investors' moods much good. As a cloud continues to rumble over equity markets, this week's news is unlikely to provide any silver linings.

The City has been treated to a series of four-day weeks, but the holidays do not seem to have done investors' moods much good. As a cloud continues to rumble over equity markets, this week's news is unlikely to provide any silver linings.

As ever, US indicators will dominate proceedings. Tomorrow, when most UK traders should be enjoying a lie-in, Wall Street will be bracing itself for the National Association of Purchasing Managers' survey.

The report is regarded by analysts as the crucial indicator of North American economic strength, and the consensus is that the level will show a weaker economy than last month. Whatever the result, it is sure to fan the flames of the current big debate over whether things have reached a current peak.

Recent volatility in equities can be partly explained by the tension between two points of view. There are those who see the world economy as being on a runaway growth-curve, and in pressing need of measures that will cool things down.

Others disagree, believing that the interest rate rises so far imposed have already achieved that. Trevor Greetham, a senior economist at Merrill Lynch, falls into the latter camp, citing lower American GDP figures, the slide in commodity prices and the recent sell-off of technology stocks as evidence of this.

Also closely watched will be the US unemployment figures and average hourly earnings announced at the end of the week. In combination, the indicators will crystallise analysts' outlooks on likely interest rate movements.

Most investors have grudgingly reached the conclusion that May will see a half-point rise, with very likely a further quarter-point rise in June. Funnily enough, the predictions that had such a devastating effect three weeks ago could be fairly calmly absorbed. The mood is downbeat, but this is by no means the last word.

In the UK this week, investors will have to cope with the Bank of England's interest rate announcement. Most have already priced in a quarter-point hike, but some nervous doomsayers are forecasting more rises in the pipeline.

The effect of these nerves, along with the continued strength of sterling, has been that, across the board, analysts are gradually downgrading their earnings estimates for UK companies. Expect this to prompt a further rotation back towards the defensive bastions of the old economy.

Ian Scott, an equity strategist at Lehman Brothers, predicts that investors will start looking closely at groups with solid and predictable earnings streams in sectors like oil and pharmaceuticals.

Also on the list of stalwarts are the food and beverage producers. This week includes results from Whitbread and Allied Domecq, which should swing them fully on to the City's radar, and conceivably boost the whole sector.

In terms of the results themselves, Whitbread is expected to give a clearer picture of its strategy, and investors will be waiting to see how Allied has done in its first year as a clean spirits play. Analysts are expecting the booze-makers to have reaped the rewards of buoyant sales in the US, Spain and some emerging markets.

One source of amusement later in the week will be the interim statement from Lastminute.com. Although the shares have clawed back above 200p from a low of around 150p, the company has become the celebrated whipping-boy of the brave new economy.

House broker Morgan Stanley, which floated the company at a dizzy 380p, has published a gloriously bullish research note. Apparently the market can expect the group, valued at a hair-raising £300 million, to break even by 2003.

In Europe, the mood in French and Italian markets will be shaped by the respective consumer and business confidence surveys mid-week. While these are not giving strategists much cause for long-term concern, some warn they will contribute to a steady decrease in equity volumes, creating a jumpy environment.

By the end of this week, the City will be opening its welcoming arms to London's new mayor. Asked whether the election would have any effect on the markets, one trader said: "Only if he decides to turn the stock exchange into a refugee day-centre."