Dim view on central banks

Dim view on central banks, Cisco

RTGAM


Investors will have one eye on Europe and another on North America on Thursday morning, with both markets likely to make big moves on the downside.


In widely expected decisions, the Bank of England hiked its key interest rate by 25 basis points (or a quarter of a percentage point) on Thursday, to 5.25 per cent, warning about the risks of inflation but also stating that it had to balance those risks against the threat of a sharp downturn in economic activity. At the same time, the European Central Bank held its key rate steady this morning, at a six-year high.


Despite the decision to say put, ECB President Jean-Claude Trichet told a press conference that his views on the economy were far from sunny: "As the reappraisal of risk in financial markets continues, there remains unusually high uncertainty about its overall impact on the real economy," he said.
Clearly, investors did not take kindly to the moves by the two central banks, driving down European shares sharply. The U.K.'s FTSE 100 fell 2.8 per cent in early afternoon trading and Germany DAX index fell 2.7 per cent.

North American stocks are likely to take a similar thumping when markets open. Stock index futures for the S&P 500 pointed to a 1.1 per cent downturn and Nasdaq 100 futures pointed to a 1.9 per cent downturn. Part of the problem here is the fact that John Chambers, CEO of Cisco Systems Inc. - considered a bellwether stock for the technology sector - warned late on Wednesday that the company's results will be under pressure for some time.

"It's the most cautious I've seen CEOs in the U.S. and Europe in many years," Mr. Chambers said on a conference call on Wednesday. In pre-market trading, Cisco's stock is down 8.3 per cent, to $21.17 (U.S.).


In Canada, investors will weigh key earnings news that was released in the morning. On the upside, Air Canada blew away expectations with net income rising to $35-million in the fourth quarter, up from a $144-million loss last year. Revenue rose 4 per cent. On the downside, struggling food retailer Loblaw Cos. disappointed expectations. Fourth quarter earnings rose to $40-million, up from a loss of $756-million last year - but the results were lower than analysts had expected.


Copyright 2001 The Globe and Mail

Cue the selloff, as investors suddenly felt less certain that the Fed would come to their rescue

Inflation comments sour sentiment

RTGAM




Take one tentative stock market rally, add a Fed official's comments about inflation and watch the rally fizzle. This was the recipe for Wednesday, when North American stocks came out of the gate with a jump but then stumbled in the afternoon, leaving major indexes down for the day and dashing hopes for a turnaround following the big selloff on Tuesday.


The inflation comments came from Charles Plosser, chief executive officer of the Federal Reserve Bank of Philadelphia, during a speech at the Birmingham Rotary Club. A lot of the speech was mere throat-clearing, but his thoughts on how the U.S. Federal Reserve must approach rate cuts in the face of troublesome inflation were particularly arresting.


Here is the part that took investors by their lapels and shook them: "There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible. To borrow a line attributed to that famous, or perhaps infamous, Union Admiral David Farragut at the Battle of Mobile Bay, it is sort of a 'damn the torpedoes, full speed ahead' approach to policy. But the Fed has a dual mandate for a reason. Price stability is a necessary component for achieving sustained economic growth. Ignoring price stability during times of economic weakness risks undermining our ability to achieve economic growth over the long run. It fuels higher inflation down the road and risks inappropriate risk taking and recurring boom/bust cycles. This would be counterproductive."


Before the speech: According to fed funds futures - via David Rosenberg, North American economist at Merrill Lynch - investors believed that the Fed would cut rates by half a percentage point on March 18 and would bring rates down to just 2 per cent by August.

After the speech: Cue the selloff, as investors suddenly felt less certain that the Fed would come to their rescue.

The Dow Jones industrial average, which had rallied as much as 125 points, ended the day at 12,200.1, down 65.03 points or 0.5 per cent. The S&P 500 closed at 1326.45, down 0.8 per cent, weighed down by Apple Inc., CME Group Inc., Chevron Corp. and Microsoft Corp. In Canada, the S&P/TSX composite index, up 135 points mid-day, ended at 12,867.2, down 64.75 points or 0.5 per cent, in a decline was fed in part by lower oil prices. The biggest losers included Research In Motion Ltd., EnCana Corp., Canadian Natural Resources Ltd. and Petro-Canada.

Copyright 2001 The Globe and Mail