Market rises despite Bank warning

THE FTSE 100 index moved up towards the top end of its recent 3,650-3,850 trading range yesterday, despite a warning from the Bank of England that interest rates would need to rise if the government is to meet its inflation target.

It was hard to pin down the exact reason for Footsie's rise. A dash of takeover speculation certainly helped but the day's corporate results, while generally as good as, or better than, expectations, saw three of the four reporting Footsie constituents fall in price.

The Footsie recorded its sixth consecutive gain, adding 22.7 points to reach 3,811.1. It was ahead throughout the session and held on when the Dow Jones Industrial Average, after an early rise, slipped to an eight point loss by the close of London trading. The FTSE Mid 250 index was up 15.5 to 4,309.

The Bank's views on rates, which were published in its quarterly inflation report, had been well aired in the weekend press and traders greeted the news with equanimity. Short sterling futures, the market's vehicle for speculating on rate changes, weakened a little but were still only looking for base rates to edge up to 6 per cent by March 1997. Gilts were supportive, with the benchmark 10 year issue rising by an eighth of a point.

Whatever the economic arguments, the market is aware that the Chancellor has political reasons to cut rates. And, on the electoral front, traders yesterday reacted positively to the latest opinion poll which showed the Conservatives narrowing the gap with Labour.

Figures from Abbey National, Standard Chartered and GKN were mostly in line with expectations but profit taking, and some disappointment at the lack of a buy back from Abbey, took the shine off the shares.

But bulls could take cheer from renewed hopes of a multi billion pound takeover. Last week, the rumours centred on Unilever and Cadbury Schweppes; yesterday, on top of some renewed utilities talk, the gossip concerned Reed, and a possible move for either Reuters or Pearson, the media group which owns the Financial Times. Analysts, however, were dubious about the likelihood of such a move.

Mr George Hodgson, UK equity strategist at SBC Warburg says "there are a few fairly will take over stories flying around and one must remember we're in the middle of the summer and volume is thin. Results have been pretty positive but, while financials have done very well, industrials have looked good only in relation to reduced expectations".

Turnover received a lift from a £100 million plus programme trade, which was designed to rebalance the British portfolio of a foreign institutional investor. By the 6 p.m. count, the number of shares traded was 808.9 million. The value of retail business on Tuesday was £2.16 billion sterling, the healthiest level for some time, thanks to the Barclays' buyback programme.