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Oct 30 - Nov 05, 2000

German economy to slow

Germany's six leading economic think-tanks said on Tuesday the fallout from high oil prices and recent interest-rate hikes would cause growth in Europe's largest economy to slow to 2.7 per cent next year from 3.0 per cent this year.

The institutes, in their half-yearly economic outlook, also forecast that the euro zone economy would expand 2.8 per cent next year, slowing from 3.3 per cent, and foresaw a soft landing for the galloping United States economy and slow growth in Japan.

"Signs are growing in Germany that the economy is cooling," the institutes said, noting that oil prices at 10-year highs would restrict domestic demand and weaken the terms of trade for Germany and its main European export markets.

The European Central Bank's succession of interest-rate increases in recent months would also dampen growth next year, the institutes said, arguing strongly against any further tightening of monetary policy.

The study said that, in contrast to the oil crises of the 1970s, there was now little danger that high crude prices — expected to average $29 a barrel this year and $27 in 2001 — would spark a spiral of rising wages and prices, or an economic slump.

"It is unlikely that we will slide into a recession of the sort we saw during the oil crises of the 1970s," Udo Ludwig, chief economist at the IWH institute in Halle, told a news conference.

The institutes said the oil shock had hit during an upturn accompanied by price stability in Germany, and forecast that inflation — which last month accelerated to 2.5 per cent, a six-year high — would average 1.9 per cent this year and 1.7 per cent in 2001.

The report forecast inflation in the euro zone at 2.3 per cent this year and 2.1 per cent in 2001 — only marginally above the target level set by the ECB.

U.K. GDP rises, but slowly

The British economy slowed as expected in the third quarter of the year, easing pressure on the Bank of England to raise interest rates further, official statistics showed Friday.

National Statistics reported that gross domestic product grew by a provisional 0.7 per cent in the third quarter, down from 0.9 per cent in the second quarter. GDP growth on the year slowed to 2.9 per cent from 3.2 per cent. These were exactly in line with expectations. The U.K. economy has advanced for 33 straight quarters.

The service sector, which has been the motor of strong demand in recent years, grew 0.7 per cent in the latest quarter and 3.3 per cent from the year earlier. This was down from 0.9 per cent and 3.5 per cent in the second quarter.

While the economy still shows robust strength, economists said the nation's central bank would take heart from the knowledge that it is slowing.

"It is broadly in line with what the MPC (Monetary Policy Committee) were looking for — a modest slowdown from the second quarter," said Adam Chester, economist at Halifax PLC.

"So they will not be worried by these numbers, although growth is still above trend," he added.

But given that last month's fuel crisis is expected to have had an indirect effect on growth, the MPC may not be out of the woods yet.

Following a surprise 0.6 per cent jump in retail sales in September, economists had feared that GDP growth might come in on the strong side of forecasts.

Although the economy still is growing above its trend rate, roughly around 2.5 per cent annually, some MPC members think structural changes in the economy will allow GDP to grow more quickly than before without stoking inflation.

Asian markets mixed

Trade in Asian markets was mixed by midday Friday. Sony's less-than-stellar earnings news tempered gains on the Tokyo market, while in Hong Kong and elsewhere, heavyweights propelled the indices into positive territory.

In Tokyo, the Nikkei 225 was down 0.04 per cent at 14,852.42. In Hong Kong, the Hang Seng index was up about one per cent at 15,150.

Hong Kong shares were modestly higher on Friday morning. The blue chip Hang Seng index was up 151 points or about one per cent at 15,150 after the first nine minutes of trading.

In early trade, the Singapore Straits Time index was up 1.03 per cent, or 19.78 points, at 1,942.06.

Australian shares made gains on Friday. The benchmark S&P/ASX 200 index opened 16.0 points higher at 3,255.7

France says economic policies must change

Euro-zone countries must strengthen their fiscal policies to underpin the euro, French Finance Minister Laurent Fabius said on Thursday, apparently acknowledging central bank pressure for economic restructuring.

France and other euro-zone countries must increase efforts to strengthen their economies and budgets, Fabius said, arguing that the euro had room to rise by about 20-25 per cent to parity with the dollar.

France "certainly has efforts to make" with its economy and budget in order to increase confidence in the euro, Fabius told the national parliament's delegation to the European Union as the single currency hit a record low value of $0.8320.

But he added that other euro-zone countries also needed to make efforts for the single currency to rise in value against the dollar.

The comments indicated a shift in emphasis by Fabius, who had tried in July to increase political influence over the European Central Bank (ECB) in the setting of euro-zone inflation targets.

Euro plunges to record low

The euro plunged to a record low point on Thursday because G-20 countries had not spoken out in support of the wilting currency.

Prospects of central bank intervention, which had sown caution in the market, vanished after the meeting of the Group of 20 industrialised and developing nations in Montreal ended on Wednesday with no attempt to talk up the single European currency, analysts said.

The euro tumbled to $0.8230, then recovered to $0.8291 from 0.8368 in New York late on Wednesday. The euro was being traded at 89.63 yen from 89.43 yen in New York. The dollar bought 108.12 yen, unchanged from New York trading.

The euro had been propped up in recent weeks by the prospect of further central bank intervention.

The market had been particularly cautious ahead of the G-20 gathering because the last intervention on September 22 had occurred on the eve of a G7 summit in Prague.

European gold prices

After convincingly breaking the bottom of its recent range, gold's outlook on Thursday was very negative, European traders said, and renewed euro weakness was pushing it towards the $266.50 level.

Moreover, new Aussie dollar lows in addition to the weak euro should pressure gold to the downside. We look for nearby support at $266 and then at $263.

Along with the knock-on negative effect from the currency fluctuations, gold was suffering from other influences too.

Ahead of options expiry, next week's COMEX expiry and the Bank of England auction the following week, it is (the price dip) probably (due to) tactical getting out of positions and being covered, said Andy Smith, analyst at Mitsui.

We were in the $270-$290 range since the end of February and often any initial big move out of a range is a false one. Take January 1996 — for two years the range was $370-$395 and then we moved $410 and above, before subsequently losing $160.

US to write off loans to 30 poorest countries

The US Congress has agreed to write off loans to 30 of the world's poorest countries as part of a foreign aid package that will include the full $435 million sought by the Clinton administration as debt relief.

The relief package relates to what are called the heavily indebted poor countries (HIPCs), located mostly in Africa and Latin America. Even if Pakistan was not under an economic embargo by the US, it would still not be on the HIPC list.

The package approved by Congress will, among other things, lift Republican-imposed restrictions on aid to international family planning groups that advocate liberalized abortion laws.

The initiative for debt relief was taken by the G-7 countries as a whole some two years ago and has been vigorously advocated by the Clinton administration.

China's crude imports

China's crude import rate is expected to remain slow in December after the country reduced imports sharply in October and November, Chinese state oil traders said on Monday.

They estimate that the government has issued import quotas for the year totalling 60m tons, but that imports to date may already be close to that level.

Latest import data showed that crude imports were 52m tons by the end of September, already an annual record surpassing the full-year 1999 record of 36.61m tons.

Third-quarter 2000 imports were 19.61m tons, up 82 per cent over the third quarter of 1999, official data showed.

But a crude trader with China International United Petroleum and Chemicals Corp (Unipec) said October and November imports were significantly lower than the third quarter's implied imports of 6.5m tons a month, because quotas were dwindling and stocks rising.

Nasdaq back from the dead

Wall Street clawed its way out of a deep hole Thursday after money poured into some of technology's hardest hit blue chips: Microsoft, Intel and Cisco Systems.

In a late turnaround, the Dow Jones industrial average erased a 61-point deficit to claim its fifth gain in six sessions. And the Nasdaq composite index, which fell within seven points of its lowest close of the year, rose for the first time all week.

The Nasdaq composite index rose 42.61 points, or 1.3 per cent, to 3,272.18 after coming within seven points of its lowest close of the year, 3,074.68, on Oct. 12. The Dow Jones industrial average rose 53.64 to 10,380.12, while the S&P 500 declined 0.46 to 1,364.44.

Advancing issues on the New York Stock Exchange edged out declining ones 1,449 to 1,408. More than 1.2 billion shares traded.


JDS: JDS Uniphase, the world's largest supplier of components for fiber-optic networking systems, reported a fiscal first-quarter profit that topped expectations on stronger-than-expected revenue. JDS said it earned $177 million, or 18 cents per share, excluding special charges.

Compaq: Compaq Computer Corp. on Tuesday reported a third-quarter profit of 30 cents per share. After the close of trading, Compaq said it earned $550 million, or 32 cents per share, during the period ended Sept. 30.

Nortel: Nortel Networks Corp. beat Wall Street's earnings forecasts by a penny per share Tuesday with an 83 per cent surge in third-quarter operating profit. Nortel earned $574 million, or 18 cents per diluted share, up from $314 million, or 11 cents per share, in the year-earlier quarter.

Amazon: For the third quarter ended Sept. 30, Amazon reported a pro-forma operating loss of $68 million, or 25 cents per share.

$240 billion tax cut bill

President Clinton warned Congress on Thursday he will veto a $240 billion tax-cut bill that includes a $1-per-hour hike in the minimum wage and nearly $30 billion for Medicare providers because the legislation falls short in school construction financing, pension reform and other areas.

The tax bill passed the House earlier Thursday by a 237-174 margin, mostly along partly lines.

The tally fell 52 votes short of the 289 needed to override a veto.

The bill would allow wage-earners to increase tax-free 401K allocations from $10,000 to $15,000 per year. It would also increase tax-free IRA contributions from $2,000 to $5,000. It also would make health insurance premiums for the self-employed tax-deductible.

Mergers & Acquisitions

Gates—Alaska Air: Software billionaire and Microsoft Corp. co-founder Bill Gates holds a 5.3 per cent stake in Alaska Air Group Inc., the No. 10 U.S. airline, according to a filing Thursday with the Securities and Exchange Commission.

Eircom—Denis O'Brien: Irish entrepreneur and telecom industry whiz Denis O'Brien on Thursday unveiled a 2.25 billion ($1.87 billion) offer to buy the fixed-line telecom business of eircom PLC, as the former state-owned Irish phone monopoly confirmed that it was in exclusive talks with Vodafone Group PLC about selling its mobile business.

Novellus—Gasonics: Novellus Systems Inc., maker of technology for the semiconductor industry, said on Wednesday it would buy Gasonics International Corp for $347 million in stock.

Faurecia—Sommer: French auto interior maker Faurecia said Wednesday it is buying Sommer Allibert's automotive business for $1.2 billion, creating a company that can churn out a comprehensive line of auto fittings from seats to dashboards.

HP—Bluestone: Hewlett-Packard Co. Tuesday said it reached an agreement to buy Bluestone Software Inc. Hewlett-Packard, a Palo Alto, Calif.-based computer maker, will pay 0.2433 of its shares, pre-split, for every share of Philadelphia, Pa.-based Bluestone, in an all-stock deal that it expects will add to share earnings in fiscal 2001.

Weatherford—Universal: Weatherford International agreed Tuesday to acquire a 48 per cent stake in Universal Compression Inc. in a complicated three-way transaction that will create the world's second-largest provider of natural gas compression services.

U.S. Treasurys creep lower

Longer-dated U.S. Treasurys were held ransom by the fate of the convulsing Nasdaq stock index on Thursday, first trading a full point higher as technology shares swooned, but then giving up most of their gains as stocks rebounded. Treasurys have benefited recently from sharp slides in equity prices as investors have sought out short-term government debt as a safe haven.

Two-year Treasury notes were 2/32 lower at 99-22/32, as their yield, which moves inversely to the price, rose to 5.91 per cent. Benchmark 10-year notes were off 3/32 at 100-13/32, yielding 5.69 per cent. The 30-year bond rose 6/32 to 107-10/32, yielding 5.73 per cent. And five-year notes were 3/32 lower at 103-30/32, yielding 5.75 per cent.

Mortgage rates take a dive

Mortgage rates fell steeply, pressured by a volatile stock market and unrest in the Middle East, according to a survey released by Freddie Mac this week.

The benchmark 30-year fixed-rate mortgage (FRM) averaged 7.68 per cent for the week ending Oct. 27, down sharply from last week's average of 7.83 per cent. The average this week for a 15-year fixed-rate mortgage was 7.36 per cent, a drop from last week's average of 7.5 per cent. One-year adjustable-rate mortgages (ARMs) this week averaged 7.22 per cent, edging down from last week's average of 7.25 per cent. The same mortgage averaged 6.35 per cent this time last year.

Jobless claims drop

The number of Americans filing new claims for unemployment benefits slipped to 305,000 for the week ended Oct. 21 from a revised 310,000 the week before, the government reported Thursday.

Last week's initial claims number was the lowest since the 301,000 reported Sept. 30.

Economists polled by Briefing.com had forecast U.S. jobless claims of 305,000 for the period.