International Markets: New York: Stocks continue to defy gravity

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US STOCKS are expected to resume their climb this week on optimism that first-quarter earnings reports will top expectations. Microsoft said last week that first-quarter profits were stronger than estimated, and while it expects the pace to slow, investors were reassured that damage to US profits from the weak Asian economies is limited.

In the bond market, everybody is bullish but some just don't want to buy bonds. Money managers say they are reluctant to take on long-term US Treasury debt, as notes maturing in two years pay almost the same rate of interest.

The yield difference between two-year Treasury notes and 30-year bonds narrowed to 33 basis points on Friday, less than half the 68-point average of the last two years. Longer-term assets, which are more vulnerable to inflation, don't hold much appeal without clear signs the robust economy is slowing.

Benchmark 30-year US Treasury securities rose 7/32 on Friday, pushing yield down 1 basis point to 5.96 per cent. They have traded between 5.86 and 5.98 per cent since 9 March.

Investors may also be reluctant to place big bets on the direction of US stocks until after a meeting of the Federal Reserve's interest-rate policy committee on Tuesday.

"As long as rates remain at the benign level that they are now, which seems reasonable, we still have a lot of interest in owning stocks," said David Bayer, a money manager at American Express Financial Advisers.

US stocks have some catching up to do. The Dow Jones slid 1.2 per cent, to 8796.08 last week after closing at a record 8906.43 the previous Friday. It was the Dow's first weekly decline since 23 January. The S&P 500 Index slipped 0.3 per cent to 1095.44, after setting a record 1105.65 on Tuesday. The Nasdaq rose 1.9 per cent to 1823.65.

Investors looking for evidence that corporate profits are on course to match or better estimates will get their share of reports this week. Among companies set to release results are drugstore chain Rite Aid, Lone Star Steakhouse & Saloon and Bed Bath & Beyond.

So far this quarter, 81 companies have warned that profits will fall short of forecasts, in line with levels of the past four quarters. "Even with the lingering effect of Asia, earnings haven't fallen off a cliff," Mr Bayer said. "Most of Europe and the US is strong."

That strength is reflected in the performance of stocks this quarter. The 30-stock Dow is up 11.2 per cent. The gains worry some investors that prices could be primed for a pullback. "I don't see why the market should go completely unscathed in 1998. It would be remarkable," said Peter Keane, president of IJL Capital Management.

Copyright: IOS & Bloomberg