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The FT-SE 100 index increased by 0.4% last week. On Monday 20th it reached another all-time intra-day high of 3639....
The FT-SE 100 index increased by 0.4% last week. On Monday 20th it reached another all-time intra-day high of 3639.5, and it ended the week only just below this level, at 3624.0. This was a good performance because, as is usual in the week before the budget, trading volumes were low (a situation exacerbated by the Thanksgiving Holiday in the United States last Thursday). In such circumstances markets tend to drift downwards rather than to reach all-time highs.

The continued rally in gilt yields (see 'Thoughts on the Gilt Market') was an important factor supporting the equity market, as was the return of take-over activity: Granada made a contested bid of £3bn for the Forte empire, and Lyonnaise des Eaux bid for Northumbrian Water. The fact that the US equity market continues to achieve new highs, with the Dow Jones index breaching 5,000 for the first time last week, also offers powerful support.

This week the budget will dominate UK financial markets. If the Chancellor can produce the right mix of personal tax cuts and reductions in planned spending to keep the Public Sector Borrowing Requirement firmly on a downward path, hopes for an early cut in base rates will rise. This will certainly lift the gilt market; it may well lift the equity market too.

When the equity market has not followed the gilt market higher this year, or has fallen independently of it, it has usually been the result of concerns about companies' profits. This week sees several leading companies report their latest results, including Hanson, Grand Metropolitan, the Royal Bank of Scotland and Argyll. If these are uniformly disappointing, the equity market may well underperform the gilt market whatever is in the budget.

Budgets always contain specific risks for the equity market too. Most obviously, a rise in company taxation would be negative. But this budget is expected to focus on the personal sector, and higher corporate taxation is felt to be very unlikely.

They may also be gains and losses for sectors within the market - the prospects for brewers and distillers, for example, are very sensitive to the level of alcohol duties. But attempting to guess the details of any budget is even more futile than trying to gauge the likely overall policy stance.

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