Equities rally on Iraq war developments

USA

U.S. equities advanced for the third week in four, as the market was boosted by reports that the US-led allied forces have gathered on the outskirts of Baghdad after taking control of the airport.

Reports also indicated that as many as 2,500 Republican soldiers have surrendered. The positive progress on the war in Iraq overshadowed the weak economic figures that were released last week. Following a loss of 357,000 jobs in February, the U.S. economy lost another 108,000 jobs in March, which was substantially above economists' expectations.

Although the overall unemployment rate held at 5.8%, economists fear that a potential prolonged war would add pressure on further job cuts in the retail, tourism and finance sectors. Moreover, both of the ISM Manufacturing and Services Index fell below the benchmark 50-level in March, signaling deterioration in business growth.

U.S. airline stocks posted gains after American Airlines avoided filing for bankruptcy protection by laying off as many as 2,500 staff and lowering pilots' salaries by 23%. Separately, technology stocks were spurred by Dell Computer's confirmation about its 1Q-2003 sales and profit forecasts and reaffirming a more than 10% sales growth in each of its geographic markets.

However, tobacco stocks posted the biggest declines in the S&P500 last week after Illinois legislators rejected a proposal to limit the amount that the tobacco companies have to deposit to appeal legal verdicts. Altria (ex-Philip Morris) fell 12% for the week, as the company must deposit US$12 billion by April 21 if it wants to appeal a US$10 billion lawsuit it lost about
misleading advertising. R.J. Reynolds also lost 6.8% last week on this news.

Canadian equities also rallied last week. In contrast to the
loss of 108,000 jobs in the U.S., Canada created 14,200 jobs in March. Canada's overall unemployment rate slipped to 7.3% in March from February's 7.4%, signaling continued improvement in the labour market.

Separately, Air Canada was granted bankruptcy protection. The Canadian air carrier also announced to lay off 600 flight attendants in order to save costs. GE Capital, the largest creditor for Air Canada, has agreed to extend a US$700 million interim credit line to the troubled carrier. Analysts expect Air Canada's impact to the Canadian banks to be small with the total loan exposure estimated to be US$500 to US$800 million.

Bank of Montreal has agreed to buy New York-based securities firm Gerard Klauer Mattison (GKM) for US$30 million in stock to expand on the bank's US equities research division. This purchase marks Bank of Montreal's 11th U.S. acquisition in four years and management believes GKM will strengthen the research platform for its institutional equities business.

This acquisition is generally well-received by the market for its potential synergy effect. Separately, Toronto-Dominion (TD) Bank announced a C$670 million provision as restructuring costs for its international wealth management and U.S. equity options units. This charge-off is expected by the market as TD Bank's CEO Ed Clark had already guided this writedown during the bank's 2002 results.

Europe

European stocks rallied last week despite weak economic figures released by Germany. Germany's unemployment rate continued to edge higher to 10.6% in March, from 10.5% in February.

Moreover, retail sales fell by 1.2% in February as looming unemployment curtailed consumer spending in Germany. European insurance companies performed well last week. Allianz and Munch Re have been reducing their crossownership stakes.

This move came in advance of Financial Times reported that the German government has not decided whether to change the accounting rule by allowing insurance companies to defer their losses on stock holdings.

Separately, Bayer AG, Germany's largest drugmaker, climbed after winning the second U.S. case to go to trial over its withdrawn Baycol cholesterol medication.

Japan

Japanese stocks declined last week, as investors were pending for the country's banking regulator to announce conditions that banks must comply in order to avoid being taken over by the Japanese government.

Moreover, it is speculated that the Bank of Japan will buy banks' asset-backed commercial paper. Japanese exports and pharmaceutical stocks were the out-performers last week as they are seen as the defensive sectors.