Oil prices closed higher this week mainly due to tight US crude inventories. There was also some disappointment that it would take longer than expected for Iraq to resume its oil exports to the West. Looting, sabotage and security issues hamper progress. It is predicted that Iraq's oil production will only amount to 1.2 million barrels per day until September and 1.5 million barrels per day in the fourth quarter, not the third quarter as previously estimated. A relief for the market was that a tropical storm which was sweeping towards the US would miss oil and gas facilities in the Gulf of Mexico. However, the market first reacted nervously and reached a monthly high at midday on Thursday.
US equity markets are continuing a small rally which started in March. The Dow Jones won 2 percent this week. The slid on Wednesday was only a small break. Some investors have become more cautious after the recent upside and realized some gains ahead of the weeks where US companies will announce their results. If the large companies do not show disappointing figures, there is further upside potential in the market. Weak was the tobacco sector, especially Atria, a daughter company of Philip Morris, which is still confronted with massive damage claims. What the general US economy is concerned, John Snow, the US Treasury Secretary, said that recent tax cuts and low interest rates have put the economy back to growth. He criticized European leaders for not doing enough to make their economies more prosperous. There has been some irritation recently if the Bush administration favours a strong or a weak dollar but Snow made it clear that US President Bush would back a strong dollar. The US currency has fallen 35 percent in the last 18 months against the dollar and therefore boosted American exports.
In Japan, the Nikkei index made a break this week and closed slightly lower. This is no surprise as the Tokyo stock market has been soaring and has climbed over 30 percent from his 20-year low at the end of April. But not only the Nikkei showed some positive signs. The yield of Japanese government bonds was driven up from a historic low of 0.43 percent to over 1.09 percent. Moreover, according to latest surveys, large Japanese manufacturers showed the least amount of pessimism in two years. Also machinery orders were up by 6.5 percent this week. The recovery of Japan would be crucial for world markets and could help reducing some overcapacity. Japan is the second largest economy after the US with $4.2 trillion. As a comparison, the German economy, number three in the world, amounts only to $2.4 billion. However, a rally in the stock market does not automatically mean that the economy will grow.
This week, the central banks from Britain, South Korea, Singapore and Indonesia lowered their interest rates. This put some pressure on the European Central Bank to follow suit. However, Wim Duisenberg pointed out that his institution has done its part to stimulate the economy. Now the governments have to do their part which means liberalizing labour markets and curbing the excessive welfare states.
Currency investors this week were mainly looking to stock markets to find out in which direction foreign exchange markets would go. Consequently, the dollar was raising parallel to stronger US stock exchanges. Equity markets are classical indicators for the development of economies and investors seem therefore confident that the US economy will improve in the second half of the year.
Author: Nana Bendukize
