London market; Rate cut hopes fuel optimism

STOCKS are expected to gain, led by Lloyds TSB and other banks on hopes that the Bank of England will cut interest rates further. Oil stocks may slide as oil prices hover near record lows.

"We're a little more sanguine about the markets in coming weeks," said Nat Jolowicz, director at Quilter & Co. "The prospect of lower interest rates should provide reasonable support."

On Friday the FT-SE 100 index rose for a fourth day, gaining 1.00 per cent, to 5,741.9. That brought its gains last week to 3.61 per cent, led by financial companies. The index is up almost 12 per cent this year.

The FT-SE Banking index led the week's gains, with HSBC Holdings spearheading the ascent. HSBC, which makes about 45 per cent of its profit in Asia, rose 5.33 per cent, boosted after Hong Kong's biggest banks cut lending rates for the third time in eight weeks.

Bonds are little changed, with the minutes of the Bank of England's latest Monetary Policy Committee meeting bolstering expectations for interest rate cuts early in the new year.

The minutes "will probably show the bulk of the committee still in favour of aggressive easing, so rate sentiment should remain bullish [supporting gilts]", said Kirit Shah, markets strategist at Sanwa International.

The minutes of the meeting on 9 and 10 December, at which the central bank's benchmark rate was cut by a half-point to 6.25 percent, are slated for publication on Wednesday.

On Friday gilts were little changed, with yields at record lows, as traders mulled the outlook for rates amid signs the economy may not be slowing as much as previously thought.

The benchmark 10-year gilt yield fell 1 basis point to 4.43 per cent, a record low. "We've had some surprisingly strong data, and that's put paid to the idea of a January rate cut," said Joanne Collins, economist at Daiwa Europe. Still, she expects gilts to hold up, "because people are still looking for much lower rates in coming months".

Some investors believe rates could drop to 5 per cent by the middle of next year.