May 14 - 20 , 2001

ECB surprises with rate cut

The European Central Bank shocked the markets with a quarter-point interest rate cut on Thursday to counter a slowing in euro zone growth.

The ECB lowered the interest rate to 4.5 per cent, its first move in two years, from 4.75 per cent. Only three economists out of 50 polled by Reuters expected a rate cut.

The surprise move came after a raft of bad economic data from euro zone economies and was contrary to the rate policy committee's public statements, saying its mandate was to keep inflation under control.

Germany, the euro zone's largest economy, posted higher unemployment as well as lower retail sales, factory orders and manufacturing output in recent days, leading to calls for the ECB to follow the lead of the U.S. and most other leading economies.

The rate cut — the second since the ECB was established in 1998 — provided a fillip for the markets, with the euro strengthening half a cent against the U.S. dollar to 89.20 U.S. cents.

Technology and interest rate-sensitive banking stocks pushed key markets in France and Germany to new highs for the day.

Ulrich Beckman, economist at Deutsche Bank, told that he expects the ECB to cut rates again in early July, if June inflation figures are favourable. But, Backman reckons that would be "too little, to late" for growth in the euro zone.

The rate cut came 45 minutes after the Bank of England also eased rates by 0.25 of a per centage point to 5.25 per cent. The rate is at its lowest level since November 1999 but remains the highest in the Group of Seven leading industrial countries.

The move came as annual UK economic growth slowed to 2.5 per cent in the first quarter compared with 2.6 per cent in the fourth quarter of 2000.

The bank is attempting to stave off the effects of the U.S. slowdown and other negative factors such as the economic damage caused by foot-and-mouth disease afflicting UK agriculture, which has reduced tourism revenue.

House passes budget resolution as Democrats rail

The House of Representatives passed a House-Senate compromise version of the fiscal 2002 budget resolution on Wednesday amid fierce Democratic criticism that the majority Republicans are poised to stage later raids on Medicare and Social Security to finance their priorities.

The measure, which sets spending parameters for the congressional appropriations process, squeaked by with three votes to spare, 221-207. With 435 members in the House, 218 votes were required for passage.

Six Democrats broke ranks to support the resolution, which may face an even tougher time in the Senate. Three Republicans chose not to support it.

Passage came one day after House and Senate Republicans agreed on the $1.97 trillion compromise, and the joint conference committee followed suit by passing out the resolution to each house. The full amount of federal spending mirrors the budget blueprint sent to the Congress by President Bush in February, with some spending priorities shifted.

The resolution calls for $1.35 billion in tax relief over the next 11 years, somewhat less than Bush's proposed $1.6 trillion cut over 10 years. Bush's plan was sidetracked in April when the Senate shaved billions off the tax cut in favour of increased education spending.

Should the resolution clear the Senate, the next phase of the budget process will begin with congressional appropriations subcommittees setting annual allocations for the federal government's departments and agencies, and the Senate Finance and House Ways and Means committees drafting tax relief bills that conform to the budget resolution.

The 2002 fiscal year begins on October 1 of this year. Republicans hope to have a tax-relief bill signed into law by Memorial Day, just three weeks away.

Global slowdown in IT spending

The global slowdown in spending on information technology could be a blessing in disguise for India's burgeoning software service industry, according to a number of global investment house reports.

Most echo the view of Morgan Stanley, which said technology services outsourcing companies should outperform the broader technology sector, as more firms contract out their IT operations to save money and focus resources on their core business.

Morgan said in a report earlier this year that outsourcing of IT services to Asia accounted for just one per cent of the global IT services market.

Thus a 0.25 per cent increase in the outsourcing proportion could more than make up for a slowdown in IT spending growth from about 10 per cent a year to negligible growth, it said.

Retreat on Wall St.

A rally on Wall Street faded by the close Thursday as investors, continuing a pattern of questioning April's big advance, braced for the week's most important economic data.

The Dow Jones industrial average rose for only the first time this week, but just barely. The Nasdaq composite index posted its third drop in four sessions.

The Dow industrials after being up more than 113 points, finished at 10,910.44, a 43.46 point, or 0.4 per cent, advance. The Nasdaq composite index shed 27.81 points, or 1.3 per cent, to 2,128.82 after being up as much as 41 points. The S&P 500 fell 0.35 to 1,255.16.

Europe up on rate cut

Shares rose across the Continent on Thursday after the European Central Bank surprised the markets with a quarter-point interest rate cut.

London's FTSE 100 closed up 1.2 per cent at 5964.0. A quarter-point cut in interest rates to 5.25 per cent was announced by the Bank of England, which was, in this case, very much in line with what the market had expected.

Frankfurt's electronically traded Xetra Dax rose 1.8 per cent to 6,175.49, powered by luxury automaker BMW (FBMW), up 5.4 per cent.

In Paris, the CAC 40 blue chip index was up 2 per cent to 5,606.46, with European aerospace group EADS (PEADS) climbing 6.3 per cent.

In Amsterdam, the AEX index climbed 3.1 per cent, and the SMI in Zurich was 1.6 per cent higher. Milan's MIB30 index added 1 per cent.

The pan-European FTSE Eurotop 300, a broader index of the region's largest stocks, was up 1.9 per cent.

Asian markets flat, rate cut lifts

Asian markets were mostly flat on Friday as investors stayed on the sidelines, but an unexpected rate cut helped lift Tokyo shares.

Tokyo shares ticked up by midday, bolstered by the European Central Bank's (ECB) rate cut and a shot of fresh optimism for Japan's major chip-equipment makers.

The benchmark Nikkei average was 0.59 per cent higher to 14,100.24, after ending in negative turf for three straight sessions. The capital-weighted TOPIX index rose 0.11 per cent to 1,382.75.

In Hong Kong, the benchmark Hang Seng Index was up 0.32 per cent to 43.28 points at 13,648.04.

In Australian, the S&P/ASX 200 index was down just 3.4 points to 3,383.1.

The Korea Composite Stock Price Index was up 0.01 per cent at 581.43. The over-the-counter Kosdaq was flat at 81.41.

Dollar edges up against yen

The dollar edged up against the yen in Tokyo trading on Thursday as players adjusted positions amid a dearth of fresh leads, dealers said. The dollar traded at 122.20-23 yen in Tokyo on Thursday, against 121.63 yen in New York and 121.59-62 yen in Tokyo on Wednesday.

U.S. jobless claims fall

Fewer Americans lined up at the unemployment office last week as new claims for jobless benefits fell unexpectedly, according to a government report Thursday.

New claims for state unemployment benefits fell to 384,000 last week from a revised 425,000 the prior week, the Labor Department reported.

30-year bond drops

U.S. 30-year Treasury bonds extended losses to more than a full point on Thursday, after a surprise rate cut by the European Central Bank earlier in the session was seen relieving some of the need for more aggressive Federal Reserve interest rate cuts.

30-year bonds fell more than a full point to 94-22/32, yielding 5.75 per cent. Benchmark 10-year notes tumbled 24/32 to 97-30/32, yielding 5.27 per cent. Two-year notes fell 5/32 to 99-23/32, yielding 4.14 per cent, while five-year notes dropped 16/32 to 99-12/32, yielding 4.76 per cent.

Mortgage rates move lower

Mortgage rates moved lower in anticipation of a rate cut by the Federal Reserve ahead of its meeting next week and the release of new economic data this week.

The benchmark 30-year fixed-rate mortgage (FRM) averaged 7.10 per cent for the week ending May 11. The average this week for a 15-year fixed-rate mortgage was 6.61 per cent.

Mergers & Acquisitions

FelCor—MeriStar: Hotel operator FelCor Lodging Trust Inc. is buying MeriStar Hospitality Corp., another leading hotel operator, in a cash and stock deal worth $1.1 billion that will create a real estate investment company with the most hotel rooms.

Williams—Barrett: Williams Cos. Monday agreed to buy natural gas producer Barrett Resources for about $2.5 billion in cash and stock, topping a rival bid from Royal Dutch/Shell Group and winning new huge reserves of natural gas.

U.S. Bancorp—NOVA: Midwest regional bank U.S. Bancorp said on Monday it agreed to buy credit-card payment services provider NOVA Corp. for $2.1 billion in cash and stock, building up its payment-processing arm.

BNP—BancWest: France's BNP Paribas said on Monday it plans to buy 55 per cent of BancWest of the U.S. for $2.45 billion to expands its international reach.

Results

BMW: German luxury car maker BMW said net income rose to 409 million ($362 million) from 87 million. Its pretax profit rose 333 per cent to 853 million and revenue rose to 9.37 billion.

BNP Paribas: France's biggest bank BNP Paribas posted first-quarter net income of 1.25 billion ($1.1 billion) compared with 1.34 billion in the same quarter of 2000, slightly more than expected. Pretax profit edged down to 1.97 billion from 1.91 billion.

BP: The world's No. 3 oil company, BP PLC, announced a first-quarter earnings of $4.1 billion, or $1.10 per American depository shares, on Tuesday, up 52 per cent from the $2.7 billion, or 84 cents per ADS, it reported a year earlier.

MetLife: MetLife Inc., earned $384 million, or 49 cents a share, excluding one-time items, compared with $379 million, or 48 cents a share, in the year-earlier period.

News Corp.: Media conglomerate News Corp. reported net income of $127 million, or 12 cents per U.S. share, for the quarter ended in March, down from $193 million, or 18 cents a share, a year earlier.

Aventis: Franco-German firm Aventis said net profit at the Life Sciences business climbed to 306 million ($207 million), or 0.39 a share, from 186 million, or 0.24 a share, in the year earlier period.

Pfizer trumpets new drug

Pfizer Inc. said Tuesday the effectiveness of its new schizophrenia drug Geodon was comparable to Eli Lilly and Co.'s best-selling Zyprexa in a clinical trial of the two medicines, but Geodon showed safety advantages over the Lilly treatment.

U.S. productivity shrinks

U.S. workers were less productive in the first quarter for the first time in six years, the government said Tuesday, a much weaker performance than Wall Street economists had expected.

Productivity, a measure of worker output per hour, fell at a 0.1 per cent annual rate in the quarter, the Labor Department said, well below Wall Street forecasts for a 1.1-per cent growth rate and the fourth quarter's revised 2 per cent rate of growth.

It was the first time productivity shrank since a negative 0.8 per cent reading in the first quarter of 1995.

Apple to open first store

Apple Computer Inc. will open its first retail store next week in Virginia — the first of what is expected to become a chain of Apple outlets.

Merrill, HSBC launch UK net

HSBC and Merrill Lynch have launched their delayed online banking and investment joint venture in the UK.

MLHSBC.com has been held up by its technical complexity while changing market conditions have forced it to lower its sights, from individuals with at least £60,000 ($86,300) to invest, to ones with £10,000 ($14,400).

German gloom hits euro

The euro fell more than a quarter per cent against the dollar and the yen on Tuesday as traders took in gloomy German manufacturing and jobs data.

The dollar rose to a one-week high against the euro as data released on Tuesday showed German unemployment rose in April for the fourth month in a row. The seasonally adjusted total rose by a larger-than-expected 6,000.

Figures released on Monday had German manufacturing orders falling at their fastest pace in March for almost 10 years.

"The euro was already reeling as traders reacted to the German manufacturing numbers, and the jobless data compounded the gloom," said Francesca Fornasari, currency strategist at Lehman Brothers.

The euro weakened to one-week lows of around $0.8860 and day's lows of around 107.60 yen as traders responded to the data from Germany, the euro zone's largest economy.

Allianz-E.ON power cut

Europe's biggest insurance company, Allianz AG, has confirmed it is in talks with the German power company E.ON AG to reduce its stake.

Allianz holds 10.2 per cent of E.ON's stock and says it wants to reduce this to help Germany's largest power utility win U.S. regulatory approval for its 8.2 billion ($7.32 million) acquisition of Britain's Powergen.

Bush seeks trade powers

President Bush planned Monday to outline a set of principles for free trade as he renewed a quest to persuade Congress to give him trade negotiating authority.

The White House said Bush would offer "fresh new thinking" on free trade and the importance of trade promotion authority — also known as "fast track" — during a speech to the Council of the Americas, an influential business group.

Under the negotiating authority, Congress can vote up or down, but not amend, trade deals negotiated by Bush, who wants it to work out a free trade agreement for North and South America.

Bush is to make his formal request to Congress to give him the authority later this week. It faces an uncertain future on Capitol Hill.