Bears return to prowl the market

USA

The US market ended the week lower despite improvement in retail sales, due to the shorter trading week andgeopolitical uncertainty as Iraqi has to report on its military
capacity by this Sunday.

Wal-Mart, the world's largest retailer, reported a 14% increase in one-day sales after they use price discount to attract sales. However, investors were concerned that the impact on the bottom line might not be significant and profit margin could come under pressure. Share price of General Motors, Ford Motor and DaimlerChrysler fell as U.S. auto sales dropped by 13% in November.

The U.S. car manufacturers are loosing their market share to Asian and European makers. Vehicle sales for Ford Motor dropped by 20% in November and the company has lowered its earnings estimate for 4Q2002 by seven cents. United Airlines has lost a bid for a USD1.80 billion U.S. loan guarantee and as a result has triggered a share price correction for the aviation sector.

Consumer spending rose by 0.4% in October, the biggest gain in three months. Third-quarter productivity rose by 5.1%. However, November Institute for Supply Management's factory index was still below 50, suggesting that companies are reluctant when comes to
investment in new equipment.

Europe

Consumer confidence in Europe has dropped to the lowest level in five years, according to European Commission survey. On Thursday, the European Central Bank has lowered interest rate by half a percentage point to 2.75%.

In France, car and light-truck sales dropped by 10% in November, due to the rise in unemployment and slower economic growth. Consumer confidence remains unchanged in November. To stimulate consumer spending, the government has lowered household income tax by 5% in October and nine million low-income workers each received a one-off tax credit of EUR300.

Analysts suggest the credit would improve household income by about 2.0% in 4Q 2002. The government projects that 2002 GDP growth is 1.0%, the slowest growth since the 1993 recession.

In Germany, December Handelsblatt's economic barometer dropped from 1.0% to 0.6% m-o-m. Unemployment reached 10.0% in November, the highest in 4 years. KarstadtQuelle, Germany's biggest department store operator, expects 2002 earnings to drop by over 30%.

Economic growth is being adversely affected by government's decision to scrap a series of tax exemptions and to raise worker's social security contribution as means to bridge the budget gap. The Government is under pressure to cut spending in order to put the budget deficit within the European limit.

In the U.K., banking stocks were weak after Barclays issued profit warning resulting from the rising bad loans. The Engineering Employers Federation report showed that export orders have worsened from minus 8% to minus 13% in the forth quarter. November's Chartered Institute of Purchasing and Supply's index of manufacturing dropped from 50.6 to 50.0. Business activities are slowing. Manufacturers would likely lower their investments in the coming months.


Japan

Share price of exporters failed to react positively to the recent JPY weakness. Unemployment has reached a high of 5.5%. Foreign direct investment has dropped nearly 59.0% in 1H FY03/2003 as manufacturers such as Toyota Motor and Sony shifted their production to China. To stabilize the employment situation, the government is promoting work sharing.

The government is under pressure to adopt anti-deflationary measures and to speed up industry deregulation. Tax cut proposed by Prime Minister J. Koizumi, amounting to around one trillion JPY could take effect by early 2003. To make up for some of the revenue loss, the Finance Minister is thinking of raising taxes on low-malt beer and tobacco.