As predicted a fortnight ago, October has got off to a flying start, with the UK Stock Market up 6.8 per cent during the first two weeks.

Confidence of a sustained rally is growing every day, as positive newsflows back up bullish predictions.

The UK market is a significant global player, with many of its constituents being truly global companies. It cannot, therefore, act alone on purely UK information, and trends in the US are always significant.

Last week saw more than a quarter of the top 500 US companies report results. By the middle of last week, 90 companies had reported and positive surprises outnumbered negative surprises, by a ratio of 7.5 to one. Earnings are up, on average, 14.8 per cent on the same period last year. The encouraging aspect, however, is not the fact that earnings are running ahead of expectations, but that sales are also expanding. For too long we have seen profit improvements as bottom line growth, meaning cost cutbacks. Finally, investors are seeing what we have wanted to see, namely top line growth.

No longer is the profits recovery being driven along by supply-side adjustment involving corporate retrenchment and restructuring. It is now being nurtured by strengthening demand, and this puts the fundamentals for equities on more solid ground than before, underpinning valuations and the upward trend of markets. Now that the economic recovery is clearly gaining momentum, rising interest rates are bound to become an issue.

It does not necessarily follow that interest rates must be raised, as growth returns to the economy. The US Federal Reserve, as previously stated, intends to keep US interest rates on hold at one per cent for a considerable period. The last time it used this phraseology in the early 1990s, interest rates remained unchanged for 18 months. We can deduce that current rates in the US could remain at one per cent until the end of next year.

So what does this mean for UK interest rates? Mervin King, the new Governor of the Bank of England, scared mortgaged home owners last week by implying that if the economy grew above its long-term trend, that would put upward pressure on inflation. The Bank of England would feel compelled to choke this off with higher interest rates.

As yet, the economy is not growing above its long-term trend, and the fact that US interest rates will remain low, cannot be ignored. Any increase in UK interest rates could seriously damage consumer spending, halting any economic growth in its tracks.

On another theme, China is becoming increasingly relevant as a global economic superpower. The respected economist, Roger Bootle, has calculated that at current rates of growth, China will overtake the US as the world's largest economy in about 20 years. Should this be so astonishing? Not really. If we go back 500 years, China and India each accounted for about a quarter of the world's output, and the UK for only about one per cent.

ARM Holdings' long- suffering shareholders, known as the bARMy ARMy, will be hoping for continued good news when Arm reports following Intel's impressive recent trading statement.

For investment advice contact Anthony Platts on 01642 608855.

Published: 21/10/2003