Asian and European stocks surge on optimism about U.S. consumer spending

Asian stocks surged on Friday and European shares gained as investors turned more optimistic about the long-term global economic outlook, pushing Wall Street past two milestones.

Investors, who this week were concerned about fallout from the subprime mortgage market meltdown in the United States and a possible slump in consumer spending, seemed to set aside those worries for now.

Stock market indexes in Australia, South Korea, Hong Kong and Singapore all reached record peaks and the Taiwan exchange hit a seven-year high Friday after the Standard & Poor's 500-stock index surged Thursday past the 1,500 mark and the Dow Jones industrial average to 13,861.73, both records.

The firm tone continued in Europe, where the London, Frankfurt and Paris bourses all opened higher.

Investors found comfort in a number of developments, including reports from U.S. retailers that were stronger than expected and a $38.1 billion bid by Rio Tinto for Alcan, the Canadian aluminum producer.

The aluminum deal, which was endorsed by Alcan's board Thursday over a competing but less lucrative offer from Alcoa, was also reassuring for investors because it helped relieve concerns that merger activity may be falling off. The deal would create the world's largest aluminum producer once Alcan and Rio Tinto combined.

"The U.S. economy is holding up better than people had expected at first," said Chu Moon Sung of Shinhan BNP Paribas Investment Trust Management. "That leads to better earnings growth at both U.S. and Asian companies."

Tobias Levkovich, chief U.S. equity strategist for Citigroup, referring to a statement by President Franklin D. Roosevelt, said: "I can't help but fall back to the FDR line, 'There's nothing to fear but fear itself.' We were getting ourselves into a tizzy, but some of this stuff is just fear. It's not based in anything other than a psychological shift."

Just last month, stock prices suffered some of their worst losses of the year as rates spiked on Treasury securities. But many investment strategists said they believed that the stock market remained fundamentally strong, despite the recent volatility in prices.

"You just can't keep a good market down," said James Paulsenj of Wells Capital Management. "Clearly there's been this deep concern weighing over the market saying, 'Where is the consumer?' But we know now the consumer is alive and well."

Asian currencies also rose, paced by Indonesia's currency and the Philippine peso, as a regional stock rally signaled increased demand for emerging-market assets.

Investors sold yen to buy higher-yielding currencies in so-called carry trades, after the surge in U.S. stocks eased concern that a housing slump in one of Asia's biggest overseas markets might stunt export-led Asian economic growth.

"Stocks rose so much and risk appetite came back, helping Asian currencies strengthen," said Catherine Tan, head of emerging markets at Forecast Singapore. "Everyone's very bullish."

Also playing a significant role in Wall Street's bull run, analysts said, was a growing sense that the bond market had stabilized. After spiking at nearly 5.3 percent in mid-June, the yield on the benchmark 10-year Treasury note, has fallen back to around 5.1 percent.

"Our biggest concern was that interest rates were starting to move higher," said David Bianco, chief U.S. equity strategist for UBS. "They seem to have found some relative stability compared to where they were in June, and this is really an important issue."

Interest rates on long-term U.S. Treasury notes are not only stable but are above 5 percent - a rate of return that is more acceptable to investors than the 4.5 to 4.9 percent range that held for the first half of this year.