LONDON, 11 April 2005 — The global economy, although sluggish but expected to re-accelerate in the second half of 2005. The S&P 500 Index momentum indicator had correctly called for a market top in January 2004, and was subsequently followed by the slowdown in the economy. Looking at worldwide economic data published recently, both the US and China are signaling faster-than-expected growth; and even laggard economies of Japan and the euro zone are showing “tentative” signs of recovery from the weakness of late 2004.

Looking further ahead, into the second half of this year and toward 2006, one would expect global expansion to continue. Even with US consumers restrained by gently rising interest rates, overall US economic growth should be sustained by faster corporate investment spending, reflecting strong balance sheets.

The view on inflation is bearish. Disconcerting inflation developments, such as sharply rising producer prices or the persistently climbing core rate of consumer price inflation, reinforce the assumption that the US Fed will respond forcefully. The Fed is expected to raise interest rates moderately at 0.25 percent each time to a maximum of 3.25 percent by the yearend. The European Central Bank (ECB) is also likely to raise interest rates twice in two 25-basis-point steps by spring 2006.

Negative inflation surprises have already been reflected in higher bond yields and increased expectations for Fed tightening. This process is expected to continue somewhat further over the next few months. The total return bond indices moved flat as interest income and bond price weakness cancelled each other out. Watch for evidence of the total-return trend to signal a major downturn. The downtrend from February 2005 is likely to resume in the second quarter and lead bonds lower.

Consequently, a bond rebound is likely to become another selling opportunity.

As for the currency markets, I believe time is running out for the US dollar recovery.

The record external deficit remains a major negative for the greenback, while the prospect of continued interest rate increases provide some support. Thus, one would expect the result for most of this year to be volatility without any major trend. Those looking to switch out of the US dollar should do so at levels around the mid-1.20s against both the euro and Swiss franc, which is expected to be achieved in a few months’ time.

Let’s finally address the equity markets. Most of the major equity indices have reached fair value targets, and expect a correction/consolidation into the third-quarter 2005. Quality stocks should outperform as risk appetite indicators are likely to roll over. Europe and Japan have increased their lead over US. Emerging markets remained attractive with Eastern Europe and Latin America clearly ahead of Asia.

Global stock markets are close to a short-term top at the end of the first quarter 2005.

Constant review of sector strategies and monitor the increasing risks of monetary policy tightening in the United States.

To Summarize:

(1) Leading economic indicators in the United States and China confirm the view of a re- acceleration for the second half of this year, with the possibility of stronger growth even earlier.

(2) Negative inflation surprises have already been reflected in higher bond yields and increased expectations for Fed tightening. Expect this process to continue further over the next few months.

(3) The widening of the US dollar’s interest-rate differential to the euro due to the rate hikes by the US Fed and a passive ECB helps balance the bearish influence on the deficit.

(4) High crude oil prices are delaying interest rate increases in countries with low inflation and meager economic growth.

(5) Bond yields, especially in the US, are likely to rise further as the global economy re-accelerates, but the pace of increase will likely slow down. Investors should focus on shorter-term bonds or floating-rate notes.

(6) The upturn on the global equity markets remains in place. But, a major correction is expected in the second quarter of this year. Start taking profits into strength and move from overweight to neutral in stocks.

(Habib F. Faris is vice president at Clariden Bank, London.)

(The information contained here in is for information only and should not be construed as an offer or a solicitation to purchase, subscribe, sell or redeem any investments. While Clariden Bank uses reasonable efforts to obtain information from sources, which it believes to be reliable, Clariden Bank makes no representation or warranty as to the accuracy, reliability or completeness of the information.)