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June 18 - 24 , 2001

Japan falls back into recession due to weakening GDP

Japanese Finance Minister Masajuro Shiokawa conceded on Thursday the world's second biggest economy was slipping into recession as the government downgraded a key economic assessment for the fifth consecutive month.

Japan's gross domestic product is weakening at a faster rate than we had expected, said Shiokawa, responding to comments on the country's GDP contraction in the March quarter. I would expect the April-June figure to worsen, he told the upper house financial affairs committee.

A second consecutive quarter of negative growth would indicate Japan had slumped back into a technical recession, defined as two consecutive quarters of negative growth. I presume we are in a correctional phase but we have to be careful. It is tough, Prime Minister Junichiro Koizumi told reporters at his official residence. We have to endure the pain for a better tomorrow. There will be no economic recovery without structural reform. Earlier this week the government announced Japan's economy shrank 0.2 per cent in the three months to March from the previous quarter.

Japan was last in recession at the end of 1999. The government's key assessment released Thursday also pointed to recession. Although we have yet to be able to arrive at a conclusion, there is a strong possibility that the economy has entered a recession, Cabinet Office economist Haruhito Arai said. The economy is deteriorating, the Cabinet Office said in its June report, which used stronger language than in May when it said the economy is increasingly weakening. Five consecutive months is the longest run of downgrades since February 1998 when the economic assessment worsened for six straight months.

With most economic indicators pointing towards recession, the report's long-standing view that Japan was moving towards a recovery was cut in June for the first time since March 2000. Any movement towards recovery "came to an halt," Arai said. Corporate bankruptcy figures released Thursday added to the gloom.

UK pound hits lows

The UK pound weakened to an almost 16-year low against the dollar amid speculation about the timing of the country's entry into the euro zone.

The euro held its ground against the dollar, even as figures from France, the euro zone's second-largest economy, showed inflation was gathering pace, reducing the chances of the European Central Bank cutting interest rates.

The pound traded as low as $1.369, its lowest since September 1985, from $1.373 on Monday, before strengthening to hover around $1.374.

The euro traded at around $0.846 per euro, above its six-month low of $0.842. pound, fetching 61.63 UK pence compared with 61.37 pence previously.

The dollar benefited from growing worries about the euro zone economy and speculation that the election win by the UK's Labour Party last week would speed up entry into the euro zone.

Many UK business leaders expect the pound will have to lose about 15 per cent of its current value against the euro to meet entry requirements.

In the euro zone, meanwhile, French inflation quickened and German exports fell as concern grows about the state of the bloc's economy.

The ECB could have another agenda, said Bear Stearns, of keeping the euro weak to boost more competitively priced euro zone exports to stop Germany falling into recession.

French consumer prices rose by a more-than-expected 0.7 per cent in May, with the annual inflation rate jumping to 2.5 per cent on an EU-harmonized basis.

Germany's trade surplus narrowed in April from March and economists said declining exports reflected the impact of the world economic slowdown.

The German statistics office said the trade surplus narrowed to 10.2 billion German marks ($4.4 billion) in April from a revised 17.4 billion marks in March.

UK rejects early euro entry

The prospects for Britain's early entry into the euro seemed to have receded on Wednesday after the chief of the country's central bank and Downing Street both poured cold water on the idea.

Sir Eddie George, governor of the Bank of England, warned late Tuesday that the high value of Sterling against the euro was a real obstacle to early entry into the euro. He said that cutting interest rates to bring the pound into line with the euro was a "simplistic" approach which risked stoking inflation.

The single currency has dominated political debate since last week's landslide general election win by Prime Minister Tony Blair raised expectations of an early referendum on membership. But the comments by George, a close ally of the influential finance minister Gordon Brown, were seen as evidence that the government was going to resist calls for a firm timetable on entry.

ECB cuts growth forecast

The European Central Bank has lowered its forecast for economic growth in the euro zone countries.

The ECB said on Thursday that growth in the 12-nation zone should run at between 2.2 and 2.8 per cent for 2001. In December, the ECB had forecast growth could reach as high as 3.6 per cent.

Many analysts said the news will mean the ECB is likely to cut interest rates in the short term.

The Frankfurt-based central bank also warned inflation could gather pace to reach 2.7 per cent for the year. The December prediction had anticipated a minimum year-on-year inflation rate of 1.8 per cent.

HSBC chief economist Stephen King told CNN he believed growth rate of 2.5 he euro zone would be on the high side, and he expected 2 per cent at the most.

U.S. recovery seen soon

U.S. Treasury Under-Secretary for International Affairs John Taylor said Wednesday he expects the U.S. economy to recover in the third and fourth quarters of this year, with growth reaching 3 per cent by 2002.

Taylor told reporters he expects growth in the second quarter to remain in a similar range to or slightly below the 1.3 per cent growth posted in the first quarter.

"After that, in the third and fourth quarters, it will probably pick up," he said, noting the positive impact of successive interest rate reductions and government tax cuts. "By next year, we should see growth of around 3 per cent and we should get there gradually throughout this year."

China-US accord on WTO

China and the United States have reached an agreement on Beijing's accession to the World Trade Organization (WTO), resurrecting its hopes of succeeding this year in its 15-year quest to join the trade body.

The accord, announced on Saturday by the two sides, was struck this week during a meeting of the 21 Asia Pacific Economic Cooperation (APEC) trade ministers in Shanghai. It removes the final stumbling blocks in multilateral negotiations to China's accession to the WTO, which will be convened at the end of the month at the organization's Geneva headquarters. Chinese Minister of Foreign Trade and Economic Cooperation Shi Guangsheng announced the two sides had reached "full consensus" on the issue during discussions in Shanghai.

U.S. jobless claims fall

The number of new U.S. claims for state unemployment benefits fell to 428,000 last week from a revised 440,000 the prior week, the Labor Department reported Thursday.

Analysts surveyed by Briefing.com had forecast new claims of 425,000 for the week ended June 9.

Nikkei tumbles on tech losses

Tokyo's Nikkei stock average lost two per cent on Friday morning, as telecommunications and chip stocks tumbled.

The benchmark Nikkei was down 267.88 points or 2.09 per cent to 12,578.78 by midday. It was its lowest intraday level since March 21.

The broader TOPIX index dipped 20.00 points or 1.57 per cent to 1,251.83 after falling as low as 1,250.57, its lowest since March 21.

Australia's benchmark S&P/ASX200 was off about half a per cent, down 14.3 points to 3397.6 in early afternoon trading.

Korea's Kospi was down 1.11 per cent to 606.81, a loss of 6.94 points, while Hong Kong's Hang Seng index was down almost 2 per cent, losing 255 points to be at 12,993.60 just before midday.

Mergers & Acquisitions

Keppel Cap—OCBC Bank: Keppel Capital Holdings, the target of a $2.65 billion takeover offer from Singapore's OCBC Bank, confirmed Thursday it is talking to another bank, UOB.

AOL—China Net: U.S. media conglomerate AOL Time Warner Inc. and Legend Holdings, China's biggest maker of personal computers, unveiled a $200 million joint venture Monday to provide consumer Internet services in China.

KLM—BA: KLM Royal Dutch Airlines and British Airways have denied newspaper reports they have resumed talks on a possible merger.

Goldman—Epoch: Goldman Sachs Group Inc., one of Wall Street's premier and most exclusive investment banks, on Thursday said it would start pitching new stock offerings to a massive retail market, and acquire a company to accomplish such a purpose.

Celera—Axys: Celera Genomics has agreed to acquire Axys Pharmaceuticals Inc. for about $174 million in stock as part of its plan to expand into drug discovery.

Virgin—Sprint: Virgin Mobile has inked a joint venture agreement with Sprint Corp. to launch a mobile phone service under the Virgin brand in the U.S., press reports said Monday.

Peregrine—Remedy: Peregrine Systems Inc. agreed Monday to buy rival software maker Remedy Corp. for about $1.1 billion in cash and stock in a move to expand its software business to serve both small and medium-sized businesses.

DoCoMo to list in UK,U.S.

Japan's largest company NTT DoCoMo plans to list in London and New York as early as September, a report said on Friday.

FTSE plans ethical index

The UK's main stock market indices maker FTSE plans to launch its first ethical index called FTSE4Good as early as next week.

FTSE, which is jointly owned by the London Stock Exchange and the Financial Times newspaper, is in the process of completing its list of companies for a benchmark index for investors and funds to track.

One of the most difficult problems facing the compilers is whether to exclude whole industries, such as defence and tobacco, or instead work on a company-by-company basis, the FT said.

Europe markets close lower

Europe's top bourses closed lower Thursday, weighed down by forecasts of an economic slowdown in euro zone nations and U.S. profit warnings.

London's FTSE 100 lost 1.15 per cent at 5,753.1 as Britain's second-biggest cable company, Telewest Communications (TWT), fell more than 9 per cent.

In Paris, the CAC 40 blue chip index declined just over 1 per cent to 5,297.1, with consumer electronics company Thomson Multimedia (PHO) leading the losers, down 6.4 per cent.

Frankfurt's electronically traded Xetra Dax shed 1.2 per cent to 6,038.62. Europe's biggest software company SAP (FSAP) led losers with a decline of 5.8 per cent and European electronic component maker Epcos (FEPC) was down 3.6 per cent.

Bonds rise in late trade

U.S. Treasurys rose on Thursday after a tame inflation report and new signs of labor market weakness sent two-year yields below 4 per cent for the first time in more than two years, and seemed to open the door wider for more interest rate cuts by the Federal Reserve.

Two-year notes rose 2/32 to 100-14/32 as their yields, which move in the opposite direction, fell to 4.01 per cent, their lowest level since October 1998, when the Fed was cutting interest rates to avert a global credit crunch. Five-year notes were up 7/32 to 99-17/32, yielding 4.73 per cent. Benchmark 10-year notes were up 12/32 to 98-11/32, yielding 5.22 per cent. Thirty-year bonds were also up 12/32 to 96-8/32, yielding 5.64 per cent.

Mortgage rates dip again

Mortgage rates continued to slip lower for a second week as new key economic data Thursday pointed to continued absence of inflationary pressure on the economy.

According to Freddie Mac, the benchmark 30-year fixed-rate mortgage (FRM) averaged 7.14 per cent for the week ending June 15.

The average this week for a 15-year fixed-rate mortgage was 6.70 per cent.

One-year adjustable-rate mortgages (ARMs) averaged 5.82 per cent.

CDC to form No. 3 bank

French financial services group CDC has agreed to combine assets with mutual CNCE to create France's No. 3 bank, a report said on Thursday. CDC (Caisse des Depots et Consignations) and CNCE (Caisses d'Epargne) will create a joint holding company with 18 billion ($15.4 billion) of shareholder funds, the Financial Times reported.

Steel woes may spur gain

There may be help on the horizon for U.S. steelmakers, but it won't get here soon enough for LTV Steel Corp.'s Cleveland West plant.

The mill in the bankrupt steelmaker's hometown is set to be closed, very likely for good, by noon Saturday, idling about 900 employees and taking about two million tons of steelmaking capacity out of the market.

The problem for the plant is a one-third drop in steel prices during the last year due to the weakening demand for steel from major customers, such as, coupled with rising competition from both imports and non-union "mini-mills." The minimills make coils of steel sheet from scrap rather than the raw materials that integrated plants, such as Cleveland West plant use.

Global funds sour on euro

Global fund managers, convinced the U.S. will lead a rebound in the global economy, turned sour on the euro in June after a two-year love affair, according to the Merrill Lynch Fund Manager Survey published Tuesday.

The dollar is favored in part because of the recovery potential of U.S. corporate earnings, along with rising inflation figures in the euro zone's key economies.

"There has been a sea change on currencies," said David Bowers, chief global investment strategist at Merrill Lynch. "Bulls of the euro have thrown in the towel."

Gasoline prices slip

Gasoline prices fell 3-1/2 cents a gallon in the past oncerns of a summer shortage, a report said.

The average retail price of gasoline, weighted to include all grades and taxes, was about $1.73 Friday, down 3.48 cents a gallon since May 18, according to the Lundberg Survey of nearly 8,000 gas stations nationwide. It was the first price drop since March.

Prices fell despite the Memorial Day weekend, the traditional start of the summer season when driving and gasoline demand begin to peak.