Europe and Britain
After plunging on Monday, the FTSE, DAX and CAC tried to recoup losses to no avail and all three were lower on the week. Investors wavered after the FTSE and DAX improved to better than 2002 year-end levels. The indexes have risen sharply since their mid-March nadir and investors seem to be increasingly optimistic that the end of the three-year bear market could be in sight. (This recovery has been nicknamed the "Baghdad bounce" by some analysts.) And as investors become less risk averse, many could restructure their portfolios towards equities again thinking that the worst of the bear market may be over.

But developments in the currency markets, where the dollar sank to its January 4, 1999 level in overnight trading Friday, could dampen that enthusiasm. If a stronger euro bites into EMU corporate profitability while domestic demand stays anemic, it is hard to see where demand for equities will come from. The dollar's drop against the euro is likely to restrict European economic growth this year. Some analysts estimate that the rejuvenated euro will reduce nominal GDP growth in the eurozone by 1 percent per year this year and next. German and French ministers, spurred on by their exporters who are feeling the pain of the higher euro, are crying out for an interest rate cut by the ECB. But the ECB doesn't feel that the exchange rate is too high, and indeed the higher euro is salving egos long hurt by the euro's dismal past performance. The Bank also still worries about inflation.

Asia
Despite a shaky week, all six Asian/Pacific indexes followed here were higher on the week. Hong Kong gained as the SARS virus there came under control. On Friday, the WHO lifted its warning for Hong Kong, which has to be good news for everyone.

Hang Seng hit a three-month high on Friday as investors envisaged an economic rebound now that the SARS outbreak has been brought under control. However, some analysts remained wary, pointing out that recovery will take a while - especially for the territory's hospitality and travel industries. Both the government and analysts are warning that the jobless rate could reach a new record in the coming months as the travel sector, which accounts for 5 percent of total employment, continues to grapple with the fallout from the disease. The index sank after Hong Kong's first SARS case was reported in mid-March, with retail, aviation and travel sectors bearing the brunt of the losses.

Both the Nikkei and Topix were up on the week as stocks mimicked Wall Street's performance. Investors in Japan were buoyed by the prospect that Congress would pass a stimulus package to boost the U.S. economy. But banking stocks plunged early in the week before stabilizing, as investors worried that the government's bail-out of Resona, one of the big five banks, could be followed by revelations of further weakness in the financial sector. The government announced a plan to inject state funds totaling about ¥2,000 trillion ($17 billion) into the bank in order to bring its capital adequacy to 10 percent and well above the 4 percent required for a domestic bank. The capital injection means that the bank will be overwhelmingly owned by the government. The root of Resona's problem is deflation that may now be causing bad debts to grow faster than the banks' ability to deal with them.

If the ailing banking sector was not enough worry, equity investors are also concerned about the profitability of exporters because of the strengthening yen. Japanese automakers, which get as much as 90 percent of their operating profit from North America, paced both gains and losses on speculation about government moves to weaken the yen, which in turn would help bolster their profits. Exporters' shares were boosted on Friday by the promised passage of the U.S. tax package.

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