RIYADH, 19 July 2004 — Global stock markets once again landed into the red. It’s becoming a guessing game since the financial markets don’t seem to be reacting equally to the same economic signals. Before the recent rate hike, stock markets were falling on expectations that better economic growth would lead to quickly raising US rates and hence cramp growth. Now when the expectations of another aggressive rate hike have disappeared, markets still fall on corporate earning results and economic signals. It’s become a potpourri of three factors dictating the markets; interest rates, oil prices and corporate earnings.
Last week the US economy came out with mixed signals raising concerns over its recovery & interest rate hikes. The inflation gauge or Consumer Price Index (CPI) came below expectations, implication that the Fed may not alter their gradual rate rise policy stance. Industrial production was weaker than expected, inducing that manufacturers have slowed down on production, although business inventories continued to rise. A stronger University of Michigan’s consumer sentiment number indicated that the consumers believe in the growth as they were not dismayed by a significant drop in retail sales.
In Asia, Japan looks fit as a fiddle. The government and the Bank of Japan both upgraded their economic assessment of Japan’s economy in July. In the most upbeat assessment in years, they said that “recovery in production and corporate profits is spreading to domestic consumption.” They also said that “the economy is recovering at a solid pace as improvements in the corporate sector are spreading to the household sector.” The Cabinet used the phrase “solid pace” for the first time since August 1997.
However, the central bank cited continued deflation as their number one enemy due to which Japan continues to keep its extra loosed monetary policy more loose. Still in the Far East, China’s actions to curb an overheating economy met few admirers. Investors were not spooked and poured in a record $33.9 billion of direct investment in the first half of this year. Financial markets have been worried that it may be too late for China to reign in on its overheating economy causing it to bust from boom causing ripples of uncertainty in the Far East, especially Japan, Taiwan and Korea, that a hard landing may cause disastrous effects for the region. However recent data shows that the hard landing has turned to a soft landing as the GDP for the second quarter grew 9.6 percent y/y but slowed down from previous quarter. This comes as good news for those believing that a slump in China, with rising rates in US and high oil prices may cause major risks to the global economy.
Locally, a consortium which included UAE’s Etisalat offered the highest bid to become the second GSM operator in Saudi Arabia. Etisalat beat the crowd of 6 by offering SR12.21 billion ($3.26 billion) closely followed by South Africa’s MTN with SR11.05 billion ($2.95 billion), and Egypt’s Orascom with SR9.8 billion ($2.61 billion).
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)