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Markets
roiled then rallied on interest rate hikes Equities
were mixed Selected World Stock Indexes
Europe - Both the German DAX and Paris CAC shrugged off the increase in U.S. interest rates and a surprise 25 basis point hike by the European Central Bank and climbed to new closing highs. The DAX was wrapped up in the merger saga between Mannesmann and Vodafone. When finally a friendly merger agreement was reached at the end of the week, shares on the DAX soared scoring record high closes on Thursday and Friday. The index ended the week at 7444.61, up 378 points or 5.4 percent.
The CAC continues to close at record highs. Paris was once again the hottest market in Europe, breaking the 6,000 - and then 6200. Telecommunication stocks were the biggest winners, boosted by news of the Vodafone-Mannesmann deal. The CAC closed the week at 6275.72, up 545 points or 9.5 percent. But the FTSE 100 did not shrug off the merger activity nor interest rate changes. The markets are expecting another interest rate increase when the Bank of England's Monetary Policy Committee meets this week. BP Amoco and Vodafone AirTouch mergers were both hit by developments connected with their multi-billion pound takeover bids, for Arco and Mannesmann, respectively. The FTSE 100 ended the week down 191 points or 3 percent at 6185. Canada - The Toronto stock market continued to fly higher with the market's key measure -- The Toronto Stock Exchange 300 Composite Index - soaring into uncharted territory above 9200 Friday. Since the beginning of 2000, the TSE 300 has the second highest gains globally after Sweden's Stockholm General while U.S. markets have been choppy. This is the land of forests and minerals, but technology stocks are center stage. Interest rates increased this week on both sides of the U.S. and Canadian border, but the TSE 300 did not blink an eye, climbing 9.8 percent on the week. The climb in Canada is not being driven by the strength in commodity prices or the turnaround in the world economy, rather it is being driven by a rally in the technology sector. The TSE 300 closed above 8000 for the first time on December 16, 1999 and has since surged more than 1,000 points in less than two months. But the success has many market watchers nervous because there is not a lot of breadth in the market. On the week, the TSE 300 closed up 818.9 points or 9.8 percent to a record 9209.2.
Asia Japan - The Nikkei rose 328 points or 1.69 percent to 19763 to close at a new 30-month high. Foreign investors resumed buying actively after the U.S. Federal Open Market Committee announced a rate increase on Wednesday. The Nikkei is pushing toward 20,000 for the first time since July 1997.
Currencies:
Where the action is Another concern that weakened the yen was Japan's mounting fiscal deficit. A statement released by an international credit rating agency said Japan's credit outlook could be jeopardized if its large fiscal deficits persist much longer. The yen was also put under pressure by poor unemployment figures that showed the first rise in six months and underlined the economy's continued dependence on government spending. Euro -The currency markets continued to focus on the sagging euro. The European Central Bank was forced to recognize that the plummeting euro was going to cause inflationary pressures and they raised their primary policy making interest rate 25 basis points to 3.25 percent - a move that many analysts thought premature given shaky economic growth especially in Germany.
The euro fell to its lowest level against the dollar on Monday as reports showed a booming U.S. economy outpacing that of the euro region. The euro rallied against the dollar Thursday after the European Central Bank raised the benchmark interest rate and its president, Wim Duisenberg, said the region's economic recovery is strong enough to withstand the higher rate without faltering. Duisenberg and other central bank officials cited the weakness in the currency as a factor leading to inflationary pressures in the region. The rate increase prevented the yield gap between the European Monetary Union and the United States from widening in the U.S.'s favor. However, after disappointing German manufacturing data were released, the euro once again began to slide downward. Central Banks
raise interest rates around the world
The European Central Bank Executive Committee (ECB) raised its policy making refinance rate by 25 basis points to 3.25 percent, maintaining the spread between U.S. and EMU interest rates at 250 basis points. The move was somewhat of a surprise with most analysts expecting an increase in March. But given increasing inflation from energy prices, the weak euro, and the Fed's rate increase on Wednesday, the ECB acted. The European Central Bank's inflation target is 2 percent and this was the bank's opportunity to establish its anti-inflationary credentials. The ECB acknowledged that inflation is rising primarily because of more expensive oil imports (which are priced in dollars) and the weak euro. The ECB is concerned that f orthcoming European wage settlements could put upward pressure on prices. EMU area liquidity is another reason for the ECB rate hike. The ECB's key money supply indicator, M3, jumped 6.1 percent and is far above its 4.5 percent target rate. In addition, the other leg of monetary policy, the harmonized consumer price index, is expected to rise in coming months because of energy prices. Many EMU member countries are above the 2 percent inflation target already. Sweden's Riksbank raised its policy making repurchase rate by 50 basis points to 3.75 percent, effective February 9th. A repo rate hike had been widely expected, given the Riksbank's warning in its December inflation report that price risks were rising. However, the 50 basis point increase was at the high end of expectations. The Riksbank said the latest rate move was to keep inflation approximately in line with its 2 percent annual target in two years' time. The Central Bank of Denmark raised its discount rate by 25 basis points to 3.25 percent within hours of the European Central Bank's decision to raise its interest rates. A spokesman for the Danish central bank confirmed that the move was influenced by the ECB's decision. The Danish central bank last raised rates following the ECB's 50 basis point rate increase in November. The Reserve Bank of Australia, citing the rebounding global economy and inflationary pressures from higher oil prices, raised lending rates by 50 basis points to 5.5 percent from 5 percent. The central bank last raised its policy making rate in early November, when it increased rates by 25 basis points to 5 percent. The bank cited strong household spending and income gains from strong employment growth for the tightening move. The bank said that indicators of capacity utilization are approaching cyclical highs and respondents to surveys are starting to report increasing difficulty in finding suitable staff, mirroring the picture in the booming U.S. economy. The unusually low inflation rates of 1997 and 1998, influenced in large part by the Asian financial downturn, have now passed. The bank's inflation range is 2 to 3 percent. As expected, the Bank of Canada raised its bank rate by 25 basis points to 5.25 per cent. This increase, which follows the decision by the Fed to raise its target level for the federal funds rate, is designed to keep the future trend of inflation well inside the Bank's 1 to 3 percent inflation target range. It also maintains the current spread of 50 basis points between U.S. and Canadian interest rates. Indicator scoreboard The December purchasing managers' index eased to 55.6 with the prices component rising to 69.2. The decline in the index was pervasive with Germany, France, Italy and United Kingdom all easing downing, yet the indexes are still at high levels. PMI index readings above 50 signify expanding activity in the manufacturing sector, readings below 50 signal contraction. The higher the reading above 50, the faster the growth.
The November trade surplus with the rest of the world was E4.0 billion, down from a surplus of E7.2 billion a year earlier. The lower November trade surplus was mainly due to increased imports, which rose more strongly than exports. EMU exports were up 12 percent when compared with last year after a 9 percent rise in October. But imports were up 18 percent when compared with last year, after rising 10 percent in October. The increased value of imports is due in large part to higher import prices, particularly for oil. December industrial producer prices excluding construction rose 0.5 percent on the month and 4.0 percent when compared with last year, indicating that price pressures are increasing strongly. As in previous months, the price increase was due largely by higher intermediate goods prices, the category that includes energy prices. Other categories were little changed. Germany - December manufacturing orders declined 1.9 percent decline. The December result may well be just a correction from the strong increases in the previous two months. In December, both foreign and domestic demand declined, and all product categories were weak. While foreign orders fell 2.9 percent on the month after a 4.1 percent rise in November, domestic orders declined for the second month in a row, down 1.2 percent after a 0.4 percent drop in November.
France - December producer price index rose 1.3 percent after a 1.4 percent jump in November. The monthly increase was led by the energy sector. The PPI was up 3.4 percent in the fourth quarter and 0.5 percent when compared with January 1999, the most recent available data in the new series. The December index has been updated to allow closer comparisons with other European Union countries and includes a wider range of products, notably in the consumer goods sector. Italy - December preliminary producer prices jumped 2.8 percent when compared with last year and were the highest since April 1996, when the annual rate also stood at 2.8 percent. The monthly increase was 0.4 percent, with half of the increase due to higher oil prices. Spain - December non-seasonally adjusted producer prices rose 0.4 percent solely due to a strong increase in energy prices. The relatively strong increase follows a much higher-than- expected PPI release from France (1.3 percent) and Italy (0.4 percent), and confirms that producer prices will continue to put upward pressure on prices in the euro zone. The annual PPI rate in December was 3.8 percent, mainly due to a base effect from very low commodity and oil prices in the same period last year. Energy prices were up 2.0 percent on the month and 16.5 percent on the year. Britain - The January Halifax house price index jumped 2.4 percent on the month and by 16 percent on the year. The Halifax played down the staggering annual increase, blaming it on the weakness of the market at the same time last year. It added that house price inflation remains well below the 34.4 percent peak recorded in October 1988. Halifax noted that the recent interest rate increases have not slowed down the housing market, yet their cumulative impact and the planned abolition of mortgage interest tax relief in April are likely to curb housing demand, easing house price inflation later in the year.
Asia
Americas January's unemployment rate stabilized at 6.8 percent, the lowest level since April 1976. Employment continued to rise, jumping 44,000. The increase in employment was matched by growth in the labor force, which left the unemployment rate the same as the prior month. Job growth was split between the private sector and self-employment, while public employment was flat. Goods producing industries increased 24,000 jobs with small gains in manufacturing and construction. BOTTOM
LINE Looking Ahead: Week of January 7th to January 11th
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