By Anne D. Picker, International Economist,Econoday
Monday, September 16, 2002

Investors who were looking for a respite in the form of lower interest rates have been disappointed the past two weeks. The European Central Bank, Bank of England, Bank of Canada and the Reserve Bank of Australia left key interest rates unchanged at 3.25 percent, 4.0 percent, 2.75 percent and 4.75 percent respectively. Growth is weak virtually everywhere with the exception of Australia. The Bank of Canada explicitly stated that it was leaving rates unchanged because of the weak U.S. economy. ECB President Wim Duisenberg said that risks to price stability appear balanced, while acknowledging that growth was weak. Duisenberg expressed concern that higher oil prices will reignite inflation. The eurozone has been more vulnerable to increases in oil prices than the United States.

The International Energy Agency is warning that crude oil stock levels are uncomfortably low ahead of the Northern Hemisphere's winter heating season and that the downward trend is "precarious" in light of the "fragile" global economy and the risk of war against Iraq. A possible war premium aside, the IEA said short-term fundamentals back the recent rise in oil prices. The monthly report was released ahead of the September 19th OPEC meeting in Osaka, Japan, where production quotas among members is scheduled to be set. Analysts - and producers alike - appear to be split on whether production quotas will be raised. Oil prices have been rising as the heightened risk of war with Iraq could disrupt Middle East shipments to the West. Prices have been hovering around $30 a barrel since mid-August. Analysts estimate that there is a war premium built into the price of oil of at least $3 to $5 a barrel.

Equities markets proved to be more volatile last week as threats of terrorist attacks around the September 11th remembrance once again tested investors' resolve to stand firm against uncertainty. Rather than enjoying a relief rally, markets sank as they resumed their economic watch and didn't like what they heard and saw. European investors were disappointed that the ECB did not lower interest rates. This combined with weak signals of economic growth were too much for investors, who sold aggressively on Thursday and Friday. (President Bush's speech to the United Nations about possible war with Iraq didn't help either.) Six of the indexes followed here managed to hold onto their gains of early in the week and close on the positive side, but the rest fell, some for the third week in a row. The gains ranged from 1.6 percent (Tokyo Topix) to 0.3 percent (Toronto S&P/TSX composite). The declines ranged from 0.3 percent (Nasdaq) to 3.6 percent (Frankfurt DAX).

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