Global Market Overview

1. Global Market Overview • Technology and telecommunications stocks were sold down very sharply following Hewlett Packard’s posting of 3Q00 earnings that were substantially below expectations. However, the very strong growth in operating profits reported on Tuesday 14 November by the UK’s Vodafone AirTouch produced a sharp recovery. Nonetheless, producers of semi-conductors remained under pressure. • The US Federal Reserve’s decision to leave interest rates unchanged, together with various signs of lower inflationary pressures, enabled yields on 10-year and 30-year Treasuries to fall by around 10 basis points over the week. • Yields on10-year Canadian and Australian government bonds dropped by around 15 basis points. The Euro and the Yen slipped against the US$ by around 1.5% and 0.9% respectively.USA/Canada • After the wild swings in the major indices, but especially the Nasdaq composite, at the beginning of the week, the US stockmarket settled down. The lack of a clear outcome to the US Presidential election kept many participants sidelined. • Over the week as a whole, the Dow Jones Industrial Average and the S&P 500 composite rose by 0.3% and 0.1% respectively. The Nasdaq composite and the Russell 2000 fell by 0.1% and rose by 0.4% respectively. • The Open Markets Committee of the US Federal Reserve kept the Federal Funds rate unchanged at 6.5%. The Committee warned that higher oil prices could feed through to increased inflation expectations. • The US CPI rose by 0.2%, and by 3.4% year-on-year, in October. Core consumer prices rose at an annual rate of 2.7% through the first ten months of the year. • Retail sales were stronger-than-expected in October, rising by 0.1% and 7.0% year-on-year. They would have been stronger but for a drop in car sales. • Industrial production fell by 0.1% in October, largely as a result of lower output by utilities. Analysts had been looking for a 0.3% rise. Capacity utilisation in September was revised downwards from 82.5% to 82.1%. • A survey by the National Federation of Independent Businesses found that the portion of small businesses that believe that now is a good time to expand dropped to 16%, the lowest level for four years. • Several major retailers, including Toys R Us, Wall-Mart, JC Penney, Target, Home Depot and Staples, posted losses or sluggish growth in net earnings for 3Q00 as a result of soft demand and/or tough competition. • Communications group ICG, which has US$2bn in high-yield bonds outstanding, filed for Chapter 11 bankruptcy protection. It secured a US$350mn credit line from Chase Manhattan Bank to finance a restructuring. • Hewlett Packard posted a 21% gain in 3Q00 net income to 21%. However, this was below expectations. HP also ended discussions over the acqusition of Price Waterhouse Cooper’s consulting business. • Verizon Wireless agreed to buy Price Communications Wireless for US$1.5bn in stock and the assumption of US$550mn. This deal will strengthen the company’s presence in the South East of the USA and give it control of the Cellular One brand. • The stock prices of networking giant Cisco Systems and fibre optic cable/hardware producer Corning rose by 5% and 13% respectively following the announcement of their joint venture. Cisco Systems separately announced the purchase of Active Voice Corp., a provider of Internet protocol-based messaging software, for US$296mn in stock. • The stock price of Armstrong Holdings, North America’s largest maker of vinyl floor coverings, dropped by 28% on the news that asbestos-related claims may drive it into bankruptcy. The company was replaced as a component of the S&P500 index by Starwood Hotels & Resorts Worldwide. • Forest products group Weyerhaeuser launched a hostile US$5.3bn bid for Willamette Industries, a rival. Weyerhaeuser is also offering to assume US$1.7bn in Willamette’s debt. • Tyco International agreed to buy Lucent Technologies’ power systems business for US$2.5bn in cash. • AT&T announced that it would spin off Liberty Media, the US$40bn media company that is presently a tracking stock, in order to comply with regulatory constraints. • Leading Canadian technology stocks such as Nortel Networks, JDS Uniphase and Research in Motion recovered sharply from the sell-down on Monday 13 November. Nonetheless, over the week as a whole, the TSE-300 composite slipped by 2.7%.

2. UK • The UK stockmarket tracked sideways after the sharp swings at the beginning of the week. The FTSE 100 and All Share indices rose by 0.6% and 0.5% respectively. The FTSE 250 and the FTSE Small Cap indices slipped by 0.3% and 0.5% respectively. • In its quarterly inflation report, the Bank of England lowered its forecasts for both economic growth and inflation. Deputy governor Mervyn King said that inflationary risks are still evenly balanced. • The core RPIX measure of inflation rose by 2% in the year to October. Headline inflation fell from 3.3% to 3.1%. Services price inflation has dropped from 4.2% at the beginning of this year to 3.1% in October. • Sweden’s OM Gruppen AB admitted defeat in its attempted take over of London Stock Exchange PLC. • Irish food group Greencore made a £258mn bid for Hazlewood Foods. • Vodafone reported that its pre-tax operating profits rose by 22% to £3.3bn in the six months to September. This outcome was ahead of analysts’ expectations. The company said that annual revenues from short-messaging, data and Internet services amounted to over £1bn. • BP Amoco said that it would sell three of its US oil refineries, in Salt Lake City UT, Mandan ND and Yorktown VA, as a part of its move to focus more on exploration and production. • Spirent, the telecommunications equipment company, bought Swedish network monitoring group Hekimian Laboratories in the USA for US$1.57bn. • Continental Europe • The continental markets were adversely affected by a number of downgrades (e.g. SAP and ASM Lithography) or disappointing earnings results (e.g. BNP Paribas and UPC). Over the week as a whole the DAX dropped by 1.5% while the CAC 40 rose by 0.2%. • The German government’s official panel of five economic advisors forecast that Germany’s GDP growth would slow from 3.0% this year to 2.8% next year. Germany will, therefore, continue to grow more slowly than Euroland as a whole. • In October, strong consumer spending and higher oil prices boosted CPI inflation in Spain to 4%, the highest level since the end of 1995 and twice the targeted rate. • The European Central Bank said that it would publish its internal economic forecasts to improve general understanding of its approach to monetary policy. • Germany’s Lufthansa said that operating profit for the full year should rise by 40% rather than the 15% generally expected. • German media giant Bertelsmann confirmed that it is in talks with the UK’s EMI in relation to a merger of their music businesses. The new company would be the world’s largest music group. • Daimler Chrysler responded to the problems of its business in North America by replacing James Holden as Chrysler CEO with Dieter Zetsche. • Deutsche Bank said that it would take a break from making acquisitions to boost its investment banking business. • The strong growth in its steel business enabled Thyssen Krupp to lift its pre-tax earnings by 60% to €1bn in the year ending September. • French/German life sciences group Aventis revealed plans to sell its agro-chemicals division or around €7bn. • Italian oil and gas group ENI said that it would spin off its €11bn domestic gas transmission network in order to comply with EU rules governing the liberalisation of the gas market. • Germany’s Dresdner Bank raised €1.5bn by selling down its stake in Munich Re from 7.4% to below 5%. Deutsche Bank said that it would accelerate the sale of its industrial holdings, which amount to around €20bn. • Thanks to the growth of its Latin American and cellular businesses, Spain’s Telefónica posted a 5% rise in net income to €1.48bn for the first nine months of 2000. • Switzerland’s auction of third-generation cellular licenses was postponed after Tele Danmark spent €2.3bn to gain control of two of the four bidding groups.

3. Japan • Merrill Lynch’s warning that semi-conductor stockpiles are higher than normal kept several of the leading electronics stocks under pressure. Strong gains by cellular operator NTT DoCoMo following its better-than-expected 1H00 result did not stop the major indices from falling over the week. The Nikkei 225, the Topix 100 and the TSE 2nd Section indices dropped by 3.0%, 2,7% and 2.6% respectively. • NTT DoCoMo revealed plans to buy 20% of KG Telecom, the fourth largest cellular operator in Taiwan, for around ¥60bn (US$556mn). Growth in mobile Internet services underpinned NTT DoCoMo’s 22% rise in net income to ¥217bn (US$2.1bn) in the six months to September. • For Toyota Motor, stronger domestic sales and a rebound in sales to the East Asian NICs compensated for the impact of the rise in the Yen in the six months to September. The company’s operating profits would have risen 3.3% to ¥208.3bn but for one-off charges to cover a shortfall in its pension fund. • Mitsubishi, the car maker in which Daimler Chrysler has a 34% stake, posted its worst ever interim results and forecast that consolidated net losses for the current March 2001 fiscal year would double from ¥70bn to ¥140bn (US$1.3bn). Mazda Motor also forecast a substantial loss this fiscal year as a result of the strength of the Yen. • Noting sluggishness in the household sector, and slowing growth in exports, the Economic Planning Agency lowered its projections of economic growth for the first time in two years. • A substantial improvement in trading profits enabled Nomura Securities to increase its net income for the six months to September by over 120% to ¥115bn (US$1.1bn). Commission income fell by 33%.Asia Pacific ex Japan • The fall in the price of the standard 64-megabit Dynamic Access Random Memory (DRAM) chip to US$3.96 clouded sentiment towards the major semi-conductor producers. This had implications for the stockmarkets of South Korea, Taiwan and, to a lesser extent, Singapore. • South Korea’s KOSPI rose on the news that Korea Land Corp., which is controlled by the government, would lend Hyundai Engineering US$175mn to save that company from bankruptcy. Nonetheless, over the week as a whole, the KOSPI fell by 2.5%. • Taiwan’s Weighted index slumped by 12.1% over the week. The banking sector was sold down sharply following a report from the central bank that suggested that non-performing loans are greater than the officially disclosed 4.5% of total loans. • Hong Kong’s Hang Seng and Singapore’s Straits Times indices dropped by 1.4% and 1.6% respectively. • Retail sales in China rose by 10.4% year-on-year in October to US$36.6bn. During the first ten months of the year, retail sales were 9.9% higher than they had been in the previous corresponding period. • Royal Dutch/Shell confirmed that it plans to spend US$300bn to take one fifth of the forthcoming IPO by China National Offshore Oil Corp. • The Taiwanese government told local shipping companies to prepare for direct links with China. • South Korea’s Hyundai Group said that it would spin off Hyundai Electronics by 2002, rather than 2003 as originally planned. • Pacific Century Cyber Works said that it had received offers from five banks to underwrite a US$4.7bn syndicated loan to refinance its borrowings. • The stock price of Singapore Telecommunications rose by around 3% on the news that it is to buy the Asian assets of British Telecommunications. The company posted a 28% rise in net income for the six months to September thanks to the strong growth in Internet-related and other services. • Singapore achieved 10.4% GDP growth in 3Q00. Official forecasts of growth for the year as a whole have been revised upwards from 9.0% to 9.5%. • The Australian government said that faster economic growth, and greater-than-expected GST receipts, should boost the budget surplus by A$1.5bn (US$0.75bn) in the current fiscal year. Official economic growth projections have been revised upwards from 3.75% to 4.0%. • Belgian utility Tractebel became the largest foreign investor in Thailand’s electricity industry when it paid US$490mn for a major stake in Cogeneration, which operates five power stations. • The Indian government announced its intention to sell a 60% stake in Air India and a 51% holding in Indian Airlines. In both cases the majority of the stock being sold will be taken by strategic investors.

4. Other Emerging Markets • The volatility in technology and telecommunications stocks had relatively little impact on the Latin American markets. The good performance of bellwether stock TelMex lifted Mexico’s IPC index by 3.2% during the week. Lingering concerns over Argentine public finances contributed to the falls in Brazil’s Bovespa index and Argentina’s Merval of 2.1% and 2.3% respectively. • An accord between Argentina’s Alliance national government and Peronist provincial governors over the sharing of tax revenues failed to materialise. Standard & Poors lowered its rating on Argentina’s foreign debt from BB to BB-. • South Africa’s Rand Merchant Bank said that it had issued a US$540mn Collateralised Debt Obligation in the USA. The CDO is backed by a pool of high yield investments. • As expected, the South African Reserve Bank kept interest rates steady, but said that it would monitor the effect of higher oil prices and the depreciation of the Rand on inflation. • The Turkish government forecast that the current account deficit will drop from 5% of GDP this year to 3-3.5% in 2001. The government expects that Turkey’s GDP growth will slip from 6% this year to about 4.5% next. • Moody’s Investor Services lifted its rating on Hungary’s foreign currency bonds and bank deposits from Baa1 to A3. The announcement caused yields on five-year and ten-year Hungarian bonds to fall by 30 basis points to 10.45% and 9.00% respectively. • Largely as a result of higher power prices, industrial producer prices in the Czech Republic rose by a greater-than-expected 1.2% in October, and 5.9% year-on-year. • A new take-over law in the Czech Republic that requires purchasers to extend their offers to all shareholders will take effect from the beginning of 2001. The new law may complicate the government’s sale of its stakes in Cesky Telecom and Ceske Radiokomunikace: potential buyers will have to make an offer to the minority shareholders. • The Polish government approved plans to scrap long-term power supply contracts between generators and the national grid. This is the first step towards liberalisation of the power market in Poland.

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