Monday, February 10, 2003
There were numerous distractions good and bad for investors last week - a surprise rate cut by the Bank of England, a good U.S. employment report, a bad German employment report, etc. But no matter - reaction was short-lived as investors' attention unfailingly slewed back to terrorism and Iraq.
As long as investors are in the sky-is-falling mode, it will be difficult for equities to make any headway. Once again the statistics are dismal. On the week, only the Japanese indexes and the London FSTE managed to rise, all others tracked here were in negative territory. The Nikkei rose 1.3 percent while the Topix managed a 2.2 percent climb. The FTSE rose 0.9 percent. Losses ranged from 0.5 percent for the Singapore Straits Times to a 6.5 percent drop by the Frankfurt DAX. German stocks were buffeted by a series of dreadful economic data releases and the devastating losses by Prime Minister Gerhard Schroeder in regional elections. And that excludes reactions to U.S. Secretary of State Powell's evidence of Iraqi violations of Security Council resolutions and the constant drum beat of terrorism threats.
One out of three central banks lowers rates
The Bank of England shocked analysts and lowered their key interest rate by 25 basis points to 3.75 percent. The reduction, the first since November 2001, put borrowing costs at their lowest level since 1955. The British economy, even though it did not fall into recession when most other countries did, grew at the slowest pace in a decade last year. Services industries, the largest portion of gross domestic product, are showing signs of slowing at a time when manufacturing continues in recession. The Bank of England uses an inflation target of 2.5 percent to guide monetary policy. In an accompanying statement, the BOE said that inflation had moved above its target "temporarily" because of jumps in gasoline and housing prices. Market reaction to the move was unfavorable. Growth has been sustained by escalating consumer debt and skyrocketing housing prices; lower rates could exacerbate both.
To no one's surprise, the European Central Bank left their key interest rate at a three-year low of 2.75 percent for the second month. The ECB had lowered rates in December 2002 by 50 basis points. The ECB adheres to a 2 percent inflation ceiling. Although prices continue to slightly breach the ceiling, the current growth rate for the EMU is the lowest in a decade. In comments prior to the meeting, Bank officials indicated that they expect the economy to recover from stagnation later this year. However, the evidence for a rate cut was compelling to many. Inflation appears to be moving into line with the bank's 2.0 percent target. The strengthening euro should continue to ease price pressures over coming months. In fact, the euro's run has become so pronounced that it has provoked the first notes of caution from ECB officials regarding its detrimental impact on economic activity.
The Reserve Bank of Australia also left its key rate target at 4.75 percent, just 50 basis points above a 30-year low. They did this to encourage consumers and businesses to continue spending despite the worst drought in a century that has cut farm production to a 20-year low. In addition, weak global demand is crimping exports, which make up 20 percent of the economy. So far, the bank hasn't cut interest rates because the economy has been expanding at an almost 4 percent annual pace, buoyed by a surge in home building and rising consumer spending. The Australian economy grew 3.7 percent in the third quarter from a year earlier.
Investor angst deepens
