Russian ripples felt in gilts

LONDON MARKET: FT-SE 1

UK STOCKS are expected to drop and bonds to gain this week as concern grows that economic turmoil in Asia and Russia will cut corporate profits, especially for banks. "Corporate earnings are continually being revised down and this is going to worsen," said Gareth Evans, an equity strategist at Nikko Europe.

On Friday, the FT-SE 100 Index tumbled 190.4 points, or 3.36 per cent, to 5477.0 - its biggest fall since 5 October 1992. Banks led declines, with Lloyds TSB plunging 41.5 pence, to 735p, and HSBC Holdings dropping 93p to 1,291p.

Still, the index closed the week little changed, supported by a rally that snapped on Thursday. Economic declines in Asia have thrown stock markets into turmoil recently as investors have bailed out of companies that depend on Asia for profit. These include banks such as HSBC and Standard Chartered, which earns 58 per cent of its profit in Asia.

Moscow warned on Friday that Russia's financial crisis will worsen. Its parliament was urged to speed the passage of measures needed to avert a collapse of the financial system. "This crisis has only just begun," said Prime Minister Sergei Kiriyenko.

Investors are concerned that combined with the woes of companies already struggling to boost profits in the face of Asia's recession, there could be further declines.

The broader FT-250 Index fell 2.08 per cent last week to 5074.5, and the FT-SE 350 Index, a combination of the other two, dropped 1.4 per cent to 2631.8. Losses were led by engineers, which make much of their profit abroad, and which fell as the pound strengthened. BTR dropped 10.9 per cent to 147 pence, Smiths Industries 9 per cent to 640p, and BBA Group 7.3 per cent to 388p.

In the gilt market, too, analysts expect Russia to be the focus. "Unless the situation there improves drastically, bonds look set to rally further," said Steve Andrew at Merrill Lynch. The only UK economic reports due this week - international trade figures and a survey of industrial activity - won't alter expectations that interest rates are on hold for the foreseeable future, and so won't affect gilt prices.

On Friday, gilts rose for a second day, driving yields to their lowest in more than 30 years, boosting demand for fixed-income assets. The yield on the benchmark government bond fell 10 basis points, to 5.44 per cent, having earlier touched a low of 5.42 per cent. That made a decline of 16 basis points in the week.