By Anne D. Picker, International Economist,Econoday
Monday, March 12, 2001

What started out as a relatively docile week with investors taking disappointments in stride, turned into a rout on Friday thanks to the combination of accumulating earnings warnings and the U.S. employment report. Investors took the employment report as a sign that the economy might not be slowing enough to prompt the Federal Reserve to cut interest rates as quickly as the financial markets would like. U.S. stocks plunged as Intel Corp.'s forecast for lower sales sent the Nasdaq Composite Index to its biggest decline since January 5 - taking overseas markets with it. But despite Friday's debacle, most indexes tracked here finished on the upside (see table below).

The Bank of Canada added its name to the ever lengthening list of central banks that have cut their policymaking interest rate. The Bank cut rates by 50 basis points to 5.25 percent. Both the Toronto Stock Exchange composite 300 index and the Canadian dollar rallied on the news. The reasons for the cut, the second in six weeks, were concerns that falling U.S. export demand would cut into economic growth more than anticipated. The United States buys 86 percent of Canada's merchandise exports. The Federal Reserve, which meets on March 20, has cut rates a full percentage point this year to try to shore up the U.S. economy.

The Reserve Bank of Australia cut its policy making interest rate 25 basis points to 5.5 percent after gross domestic product growth came to a screeching halt in the fourth quarter, dropping 0.6 percent - the first decline since 1991. When compared to last year, GDP growth fell under 4 percent for the first time in 14 quarters. (See indicator scoreboard below.)

The Bank of England, however, left its policy making interest rate at 5.75 percent with economic indicators showing little evidence that a faltering U.S. economy is curbing growth so far. The Bank had lowered its benchmark rate on February 8 for the first time in 20 months by 25 basis points to 5.75 percent and said it would review the need for a further cut, given signs of stalling U.S. economic growth. But since then, data have shown that service industries are expanding, house prices rebounding, and retail sales rising, all signs that consumer spending is strong enough to offset any decline in exports.

In yet another attempt to awaken its sleeping economy, Japan's ruling parties proposed a series of measures primarily aimed at putting a floor under the sagging stock market. They are proposing to cut capital gains, inheritance and other taxes to lift stocks from a 15 year low and avert a recession. Investors said the plan doesn't go far enough. The program also envisages stock losses becoming tax deductible, lower taxes on individual investors' dividends and setting up a private fund to buy shares that banks have traditionally held in their clients to cement ties. The yen slid after the plan was announced, trading near a 20 month low, on disappointment the government didn't propose broader tax cuts, fewer subsidies or banking reforms. Politicians contend they have little choice, saying record government debt means the nation can't use economic incentives to spur growth.

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead