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International Markets: New York - Revival ignores interest-rate fear

US stocks should extend their gains this week, spurred by optimism that the domestic economy will continue its expansion, offsetting any drag caused by sluggish overseas sales.

The advance is expected to be led by companies whose profits do best when general activity is brisk - car parts makers, aluminium companies, home builders, retailers and airlines.

In the bond market, investors said the unexpected jump in employment last month would not halt the rally that produced returns of 14 per cent on the benchmark 30-year bond this year. "We feel the long-term trend in interest rates is still down," said John Poole, at Mellon Private Asset Management in Boston. Not everyone agrees: many investors remain wary that the vibrant US economy will send interest rates higher soon.

But some investors think the Federal Reserve will not raise interest rates soon for fear of further destabilising Asian markets. "We are going to end up with an end-of-year rally," said David Bayer, manager at American Express Asset Management.

Rising interest rates and turmoil in Asia are expected to slow US exports to the Pacific. But investors expect a rise in activity throughout the US economy to lessen the toll on profits.

The Dow industrials rose 326 points, or 4.2 per cent, for the week - 110.18 points away from its all-time high of 8,259.31 set on 6 August. The Standard & Poor's 500 Index jumped 28.39, or 3 per cent, to a record 983.79

While some companies have warned that fourth-quarter results will fall short of expectations, corporate profits overall are on pace to match or exceed estimates. The pace of business in some sectors of the US economy is already brisk. The US car industry's November sales rose 3.8 per cent, or 1.2 million more sales, on the same month last year.

Not all investors are convinced that better days lie ahead for US stocks. "The stock market is fairly vulnerable," said Dirk van Dijk, equity strategist at Dean Investment Associates.

Bonds last week posted losses of as much as 1.5 points after the government said on Friday that the economy added 404,000 non-farm jobs last month, almost double expectations. Most losses were erased as bargain hunters pounced, so the yield only rose 2 basis points to 6.07 per cent. The yield on the 30-year bond has tumbled about 60 basis points since early September, with much of the gains coming from purchases by investors seeking a safe haven.

Inflation has fallen to a 1.8 per cent annual rate through the first 10 months of the year, the slowest in a decade. The Federal Reserve is forecasting that growth will slow to between 2.25 and 2.5 per cent annual rate in 1998 from about 3.6 per cent this year, because of the fallout from the Asian economies.

Copyright: IOS & Bloomberg