Global Market Overview

1. Global Market Overview • In an address to the National Governors Association, Federal Reserve chairman Alan Greenspan said that there was no sign of any faltering in the surge in productivity in the USA. This was widely taken as a signal that the Federal Reserve would leave interest rates unchanged at its August meeting. • The US$ rose slightly against the Euro, Sterling, the C$ and the A$: it remained unchanged against the Yen. • Bond markets were tranquil. However, a survey by the British Chamber of Commerce that showed that domestic growth had risen to a three-year high contributed to a slight sell-off in the Gilts market. • Over the week the yield on 10-year Gilts rose from 5.12% to 5.26%. • USA/Canada • Blue chips such as Alcoa and International Paper rose strongly following favourable earnings reports. Yahoo’s 110% increase in revenues boosted the price of that stock by 18%. Other major dot.coms such as Amazon and eBay also rose sharply. Over the week as a whole, The Dow Jones Industrial Average and the Nasdaq composite advanced by 1.7% and 5.5% respectively. The S&P500 composite and the Russell 2000 increased by 2.1% and 2.7% respectively. • US labour market statistics showed that only 11,000 jobs were created in June, compared with market expectations of up to 250,000. Jobless claims rose by 27,000 to 319,000, a 13-month high, in the week to 8 July. • The IMF Said that the US Federal Reserve had not done enough to slow the rapid pace of demand growth. Retail sales increased by 0.5% in June. Industrial production growth slowed from a revised 0.5% in May to 0.2% in June. • US Producer Prices rose by 0.6% in the month of June. However core Producer Prices, which exclude energy and food, actually fell by 0.1%. • JDS Uniphase, the leading manufacturer of fibre optic components, announced that it would buy SDL, a rival, in a US$41bn all-stock deal. This is considered to be the largest technology sector take-over ever. • Computer giant Honeywell lowered its forecasts of earnings growth for this year from 20% to 12-14%. The company said that it would cut 6,000 jobs, or 5% of the total workforce. • Gannett, the publisher of USA Today and 88 regional newspapers, said that 2Q00 earnings rose by 13%, or in line with expectations, as a result of higher advertising revenues. Thanks in part to higher advertising in the Wall Street Journal, Dow Jones posted a 76% jump in net income for 2Q00. • General Electric posted its best quarterly results ever. 2Q00 net income rose by 20% to US$3.38bn. • Lockheed Martin announced the sale of its Sanders defence electronics business to BAe Systems for US$1.67bn. • Robust conditions in the global hire-car business saw Hertz’s 2Q00 net income jump by a greater-than- expected 18%. • Higher income from fee-earning activities enabled both JP Morgan and PNC Financial Services Group to post greater-than-expected profits for 2Q00 in spite of the volatility of bond, equity and currency markets. • PepsiCo’s operating revenue and net income rose by 9% and 21% respectively in 2Q00. • Advances by Nortel Networks (on the expectation of good results for 2Q00) and by other technology stocks helped Canada’s TSE-300 composite rise to record highs. Over the week as a whole it rose by 3.8%. • UBS Warburg’s TSE-299 composite, a measure of the performance of the Canadian stockmarket that excludes Nortel Networks, surpassed its previous record high that had been established on 22 April 1998. Nortel represents about 32% of the TSE-300.

2. UK • Falls in major stocks such as BP Amoco, Shell, Glaxo Wellcome and Vodafone Airtouch contributed to the 0.3% fall in the FTSE 100 during the week. In general smaller stocks fared better. The FTSE 250 rose by 1.7% while the TechMARK 100 advanced by 3.6%. • Unemployment fell to 3.8%, the lowest level since February 1980. • In the year to May, average earnings rose by 4.6%, or marginally more than the 4.5% targetted by the government. • The RPIX measure of inflation, which excludes the effects of mortgage payments, rose by 0.2% in June and by 2.2% year-on-year. The Bank of England is targeting RPIX inflation of 2.5%. • A survey by the Confederation of British Industry found that confidence among financial services companies in the UK fell for the first time in 18 months. The drop in confidence reflects a slowdown in the growth of new business. • The stock price of Granada Media closed 5.5% above the 515p issue price on its first day of trading. The company is capitalised at £6.2bn (US$9.6bn). The stock price of mobile-phone retailer Carphone Warehouse finished the first day of trading just above the 200p issue price. • Psion, the maker of handheld computers, announced the acquisition of Teklogix International, a Canadian company that provides computer hardware and software (including wireless devices) for C$544mn (US$368mn.) • Liquor giant Diageo confirmed that it was looking to sell its Pillsbury food business in the USA to General Mills in a stock-swap transaction worth around US$11bn. • Cellular operator Orange announced the purchases of Wildfire Communications and News Takes. The two companies are, respectively, a supplier of voice recognition technology and a specialist group that reformats content for digital devices. Orange also said that it planned to launch a £300mn Internet investment fund. • The stock price of Airtours, the second-largest tour operator in the UK, slumped by 17% when the company issued a profit warning and announced that it planned to buy the 64% of Germany’s Frosch Touristik that it does not already own. Continental Europe • Germany’s Bundesrat (i.e. upper house of parliament) approved the major tax reform measures that will facilitate the unwinding of major corporate cross-shareholdings. Banks and financial services stocks rose strongly. Over the week as a whole the DAX-30 advanced by 3.8%. • Falls in particular stocks such as telecommunications conglomerate Bouygues and Credit Lyonnais kept a lid on France’s CAC, which rose by 0.1% during the week. • The stock prices of Nokia and Ericsson rose by around 5% following a report that sales of mobile phones in Finland had risen by more than 16% year-on-year in June. • Shares in EADS, the pan-European defense/aerospace group, were offered to institutional and retail investors at €19 and €18 respectively. At these levels the company was valued at €15.4bn (US$14.7bn) or at the lower end of expectations. On the first day of trading the stock price drifted down to €17.50. • Italy’s National Institute for Foreign Trade said that the country’s exports had dropped by 1.6% in volume terms during 1999. • Higher energy prices caused France’s CPI to rise by 0.2% in May and 1.7% year-on-year. • Eurostat revised its estimate of economic growth in Euroland during 1Q00 upwards from 0.7% to 0.9%. Year-on-year economic growth had been 3.4%. • Commerzbank and Dresdner Bank began discussions about a merger that may or may not be extended to include Allianz, the insurance giant that owns 22% of Dresdner. • Germany’s WestLB revealed plans to buy the private equity business of Forstmann-Leff, the US fund manager. • The withdrawal of one of the four banks handling the IPO of German online retailer Letsbuyit.com caused the deal to be postponed for a second time. • In response to the lack of demand from institutional investors for stock in Vivendi Environment, which includes the water, waste, energy and transport businesses of Vivendi, the IPO was postponed one week.

3. Continental Europe (continued) • Telecom Italia said that it was about to finalise access to a €10bn credit line that will fund a number of deals including the proposed merger of its Tin.it Internet business with yellow pages publisher Seat Pagine Gialle. • In France, Vinci made a €1.8bn all-stock offer for Groupe GTM. The combined group will be Europe’s largest construction group. • Royal Boskalis Westminster NV, the largest dredging company in the world, and Hollandsche Beton, the Netherlands’ biggest construction company, called off their planned merger. The two companies could not agree on a strategy with respect to the German construction industry. • Switzerland’s UBS said that it would buy US stockbroker Paine Webber for US$10.8bn. This deal brings UBS access to an additional US$484bn in client assets strengthens its position in US investment banking. • Deutsche Telekom bid US$30bn for US cellular operator Voicestream. • Invensys PLC said that it had acquired a 58% stake in financially troubled Dutch software company Baan following the expiry of its take-over offer. • Japan • Japanese banks were sold off when the government announced that it would not use public funds to rescue bankrupt retailing group Sogo. Other companies that, like Sogo, have filed for protection from their creditors, such as Kumagai Gumi and Hazama, were also sold down sharply. • Over the week the Nikkei 225, the Topix and the TSE 2nd Section index slipped by 1.5%, 0.8% and 0.4% respectively. • Japan’s Economic Planning Agency said that the economy continues to experience moderate improvement. However, the EPA said that the economy “still hasn’t entered an autonomous recovery phase”. Separately, Bank of Japan governor Masaru Hayami said that “economic conditions are strong enough to support higher interest rates.” • A leading spokesman for the ruling Liberal Democratic Party said that the government should aim to pass legislation that will remove the 20% limit on foreign ownership of NTT. • Asia Pacific ex Japan • Advances by banks and developers, on the assumption that US interest rates will remain at current levels until September at least, and by Hutchison Whampoa, led Hong Kong’s Hang Seng index up 4.5% during the week. • Profit-taking in heavyweight stocks such as KEPCO and Samsung Electronics was a major reason for the 1.6% fall in South Korea’s KOSPI. Profit-taking in leading property stocks caused Singapore’s Straits Times index to drop by 0.6%. • In Taiwan, banks were sold down on concerns over their exposure to financially troubled textile group Tuntex. However, major semi-conductor stocks led the stockmarket as a whole 4.0% higher over the week. • Vietnam signed a trade pact with the USA. This opens the way for Vietnam to join the World Trade Organisation. • China’s Securities Regulatory Commission said that it would permit companies that have issued H-shares (on the HKSE) or B-shares (on the Chinese markets) to issue A-shares without having to pass through the entire IPO process. • China’s government said that value-added industrial output rose by 11.2% to US$132.8bn in 1H00. A senior government official said that GDP grew by 8.2% year-on-year in 1H00 • In Australia, the Westpac-IAESR index of consumer sentiment posted its largest ever gain, of 10% in July. Consumers had reacted favourably to the smooth introduction of the new Goods and Services Tax. Commentators suggested that economic growth could remain above 4% for the rest of the June 2001 fiscal year. • South Korea’s government reached an agreement with bank union leaders to stop a one-day strike by bank workers. The workers were protesting against the loss of jobs that will result from the government's restructuring of the banking sector. • Samsung Group, Hyundai Group and LG Group all projected strong gains in earnings for 1H00.

4. Asia Pacific ex Japan (continued) • An advance estimate released by the Singapore government indicated that GDP rose by a greater-than-expected 7.7% in 2Q00. • DBS Land and Pidemco Land, two property companies that are linked with the Singapore government, said that they would merge to create the largest listed real estate group in South East Asia. Together they will have assets of around S$18bn (US$10.3bn). • Moody’s Investor Services placed the ratings of foreign currency debt of the Malaysian government on review for an upgrade. The ratings agency is reacting to the strong economic recovery, and improving external finances, of Malaysia. • The Indonesian government announced that it would pass control of financially distressed Bank Bali back to the central bank. • Other Emerging Markets • Gains by particular stocks such as PC Holdings and Banco Galicia led Argentina’s Merval index 2.1% higher during the week. • Profit-taking following the strong gains in recent weeks capped the gains of Mexico’s IPC to 0.9%. • A political scandal, centred around allegations that senior figures in the government were involved in the misappropriation of funds, overshadowed Brazil’s financial markets. The Bovespa index dropped by 4.1%. • Televisa became the first Mexican media company to offer Internet services to cable TV subscribers. • Brazil’s government began the sale of a 24.21% stake, worth US$4.4bn, in state oil company Petrobrás. • The Brazilian government authorised increases in fuel prices that will bring them in line with international levels. The retail prices of gasoline and diesel should rise by 11-12%. • The Brazilian high court refused to lift an injunction blocking the privatisation of Banespa. • Spanish power company Endesa said that it would invest US$550mn at least in Brazil’s electricity sector. AT&T said that it would invest US$500mn in Argentina’s telecommunications industry over the next five years. • Chile officially requested to join Mercosur. • The IMF commented favourably on the recent performance of Argentina’s economy as the country successfully carried out an issue of US$1.25bn in 30-year global bonds. • Turkcell closed fractionally above its US$18 offer price on the first day of trading. The IPO, of 11% of Turkey’s largest mobile telephone company, values the group at US$17bn. • South African diamond giant De Beers said that it would abandon its attempt to control the world diamond markets through its Central Sales Organisation. Instead, De Beers will aim to be the “supplier of choice” and will seek to promote the growth of the overall market for gems. De Beers also emphasised that it would avoid dealing in “blood diamonds” from war-torn countries in Africa. • The IPO of Orascom, the largest GSM cellular operator in the Middle East and Africa, was 1.8 times oversubscribed. The deal was Egypt’s biggest equity offering ever. • Hungary’s trade deficit widened from €1.222bn in April to €1.516bn in May. The National Bank of Hungary said that economic growth could accelerate from the current level (of 6.6%) without posing a threat to the external balance. • The Polish government gave three international utility companies, Vattenfall of Sweden, RWE of Germany and Public Service Enterprise Group of the USA, the right to tender for a strategic 10-20% stake in power distributor GZE. • Research group Petrologistics said that Russian fuel oil exports rose to record levels of 640,000 barrels per day in June.

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