LOM Weekly Perspectives - Financial Summary: North America, Europe and Asia-Pacific Regions

North America

Consumer sentiment in the U.S. continues to deteriorate but, thus far, it has not prevented shoppers from buying at a fairly healthy pace. However, the recent increase in retail sales was biased upward by auto sales, driven by low financing deals. So, overall, there are no signs of exhaustion but some signs of a slowdown.

Equity funds have been experiencing substantial outflows and bond funds have seen significant inflows. Investors' risk aversion has resulted in government bond funds being greatly favoured. High yield was the only fixed-income category that was out of favour. Liquidity ratios in equity funds are low and fairly stable, which may reflect managers' comfort level with exposure to the stock market. The risk is that weakness in the market and another round of redemptions may force liquidation to raise cash.

There is a cat-and-mouse game being played between Iraq and the United States. The mouse's ploy to let UN inspectors in has not convinced the cat. In an eventual military confrontation with Iraq the United States is likely to win the war fairly quickly, but winning the peace will be a tougher challenge. Markets will react positively to the first event before possible problems with the second become evident.

The pragmatism and expediency of realpolitik point to the possible solution of a palace coup in Baghdad and the installation of a "friendly" dictator in Iraq, in charge of the security apparatus. Nurturing a democratic alternative may require the commitment of substantial military and economic resources to prevent the fragmentation of the country. However, a successful changeover would pose a threat to the legitimacy of various theocracies and autocracies in the Arab world. This would be very good for the global economy in the long run.

There are indications that Washington may be reviewing its relationship with Saudi Arabia. The rentier state has a model of economy and society that is not viable, longer term. It is failing to make a transition to modernity and its eventual breakdown could become a major source of instability in the region, and well beyond.

Apart from Iraq, the equity market's main focus of attention is the outlook for earnings. Not much relief is to be had from interest rate reductions, so profitability is the major concern. The expected capital-spending rebound has not materialised and that will constrain profit performance.


With Germany running out of steam, the industrial...

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