Anxiety over the possibility of imminent interest rate increases underlie the latest sharp falls on global equity markets. Yesterday the markets generally continued the descent begun the previous day, as Wall Street pessimists dampened sentiment.

US investors have now begun to focus on data which they ignored for most of December, after it transpired that the Y2K bug would not be a problem.

In a classic demonstration of how financial markets can interpret news in a way suiting their current mood, analysts said yesterday the "bug-free" turn of the year could fuel further the US economy and make it more likely that the Federal Reserve would once again increase interest rates when it meets on February 2nd.

Data released yesterday showed US construction spending was up 2.6 per cent in December, indicating another area of the US economy which is overheating, according to Mr Jim Power, chief economist at Bank of Ireland. This Friday's December employment report will be crucial and any indication of pressure on earnings will underline expectations of an interest rate increase from 5.5 per cent to 5.75 per cent. That would hit company earnings through higher debt repayments, hence the sell-off in the stock markets.

The statement after the Federal Reserve's meeting on December 21st also suggests the Fed is increasingly concerned at the trend in the economy where demand is growing much faster than potential supply.

The increasingly strong US economic indicators also mean economist are now expecting US interest rates to end the year at 6.5 per cent rather than 6 per cent which was the previous consensus. In turn the prospect of higher interest rates is sharpening the focus on the heady valuation attached to many US stocks, particularly in the technology sector.

Interest rates are also expected to rise in Britain, where the economy is also growing strongly, as shown particularly by the strong recovery in house prices. The latest survey showed prices growing at an annual rate of some 13.7 per cent, reawakening fears of a rerun of the late 1980s house-price bust. Yesterday's release of the purchasing managers' index for the manufacturing sector was at its highest levels since 1996, despite sterling's strength.

The Bank of England's monetary policy committee is meeting again on January 13th when an interest rate rise is seen as a possibility. Lack of action, however, will only mean the markets will expect to see the rise in February instead, to 5.75 per cent from the current 5.5 per cent.

The European economy is also growing strongly and - again - interest rate rises are expected, although not until later in the year. French unemployment is down, in Germany strong manufacturing orders and output are evident and yesterday a strong euro-zone purchasing managers' index was published, indicating buoyancy in the manufacturing sector.

According to Mr Power, it is clear that the continental European economy is starting to rebound strongly. But there is a lot more spare capacity in Europe than in the US, after three years of recession.

Euro-zone unemployment remained unchanged at 9.8 per cent in November, confirming the likelihood that an interest rate increase will be pushed out a little to perhaps March when rates are expected to rise from 3 per cent to perhaps 3.25 per cent.