The City stops to catch its breath

<i>THE WEEK</i>

After one of the toughest reporting seasons for years, the City will this week be given some breathing room in which to pause, ponder and very possibly panic.

After one of the toughest reporting seasons for years, the City will this week be given some breathing room in which to pause, ponder and very possibly panic.

The flow of blue-chip results has now completely dried up in the UK, coinciding with an equally quiet time for economic indicators. Because the past month has been so busy, the market has been making most of its decisions on the run, waiting for a gap like this week to settle down and work out what on earth has been going on.

Unfortunately, those conclusions are likely to be negative. Although last week ended on a mildly upbeat note for markets around the world, only the most raging of bulls are prepared to call these levels buying opportunities.

There may be something of a rally in the early part of the week, but it will likely be abruptly stemmed and lethally dangerous to investors who bet the farm on it. Analysts who once picked the third quarter of this year as the point from which a recovery might come have now pushed that further back into next year. Others are even more reluctant to say when the misery will end.

The main preoccupation for the UK analyst community this week will be working out whether to change all the profits forecasts on British companies. So far, and despite what the market has been up to, estimates in the UK have remained fairly steady.

Companies with exposure to the slowing US economy have been downgraded, as has the entire telecoms sector, but elsewhere the general message is that the UK is robust.

There are three possible reasons for the failure to alter forecasts. First, the outlook is so uncertain that the companies themselves are unable to give useful guidance to analysts. Evidence for this view was provided by HSBC, which held a presentation at which it admitted it had no choice but to be cautious, as it could not predict what might or might not happen in markets this year.

The second reason, according to Jim Wood-Smith, an analyst at Gerrard, is that the world is slowing so fast that neither companies nor analysts have yet been able to factor this into their forecasts.

The third is that all is well here, and that there is no need to downgrade.

The actual reason may soon emerge, but the market is not in the mood to give anyone the benefit of the doubt. If the City gets wind of any more profits warnings, expect the big market slides to continue.

Wall Street could also be set for more trouble. Lead indicators of economic activity are now at levels last seen in 1990. According to research by SG Securities, US directors continue to be huge sellers of their own shares. There are now around four sellers for each buyer, suggesting that things have still got some way to fall.

Of the few UK companies reporting this week, two could produce some welcome good news. The first is Bloomsbury Publishing, of Harry Potter fame, which reports full-year results on Wednesday. The stock has been popular owing to the success of the trainee wizard novels, but the company will be keen to highlight its progress in the US market, where it has had three books in the New York Times top 10 bestsellers list in the past year.

The other is the shipbroker Horace Clarkson, whose profits have been given a gigantic boost by the astronomical levels of world shipping rates. These soared on last year's high oil price, and although they have come down a little since then, Clarkson will probably report its best results ever.

In Europe, the biggest results this week will come from the German utility group E.ON. These are the company's first full-year results, and will give the analysts a chance to get their hands on the group's balance sheet structure for the first time.

The real focus, however, will be on the company's strategy, with speculation focusing on when it will say something about its takeover talks with PowerGen, which have been dragging on since January. Rumours in Germany that E.ON would announce something early this week were played down, but the market is beginning to get impatient.

If, as some analysts suspect, the regulatory difficulties involved in buying PowerGen prove too difficult to overcome, E.ON may be pressed on whether it will then turn its sights on Scottish Power.