Growth in US fuels rate fears

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MORE evidence of upbeat economic growth in the US fuelled fears of a Federal Reserve move to raise interest rates, hitting bond and share prices around the world, writes Diane Coyle.

Wall Street fell sharply for the second day running. After a 46- point fall in the Dow Jones Industrial Average on Tuesday, it tumbled more than 50 points yesterday morning but recovered to close 14 points down at 3,787.

Shares in London followed, with the FT-SE 100 index falling 45.5 points to 2,956.3 in the quietest day of trading so far this year.

The trigger for yesterday's declines was the publication of US factory orders and shipments for August. New orders surged 4.4 per cent in August. This was the biggest increase since December 1992, and well above analysts' forecasts.

Shipments of goods out of American factories rose 4.5 per cent, in their biggest one-month increase for 15 years.

Elias Bikhazi, analyst at Deutsche Bank Securities in New York, said: 'These figures are not usually very important, but they confirm the pattern of surprises on the high side.' He expected the Fed to raise short-term interest rates as early as Friday, when employment figures will be published, or Tuesday, after the Columbus Day holiday. Others thought a move was still unlikely before Congressional elections in mid-November.

US Treasury bonds reacted sharply to the data, and the yield on long bonds rose to 7.95 per cent. Analysts said it could soon rise above 8 per cent. Rob Minikin, a senior economist at Bankers Trust, said: 'European bonds and equities have been eroded all day, and we are likely to see more knock-on effects.' Gilts bucked the trend, closing only slightly lower.

Bob Semple, equity strategist at NatWest Markets, said: 'The fall in the FT-SE was US-inspired. The mood of the market is such that it will latch on to any bad news.'

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