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Rally days: is bad news old news for the market? (Market Moves).

September has always been one of the worst months for the Dow Jones and most other international stock markets. This year was no exception, with the index registering an impressive 12% drop. It's impressive because U.S. stock markets are accumulating a two-year dive. Meanwhile, the Nasdaq and Mexico's IPC have fallen by 11% and 8% respectively.

The determining factors for this loss where the weak economic recovery in the United States, the prospect of war with Iraq and its impact on global oil prices, and lastly, the economic and political uncertainty in Brazil. However, it would seem that the market has already discounted most of these negative influences, and a rally could occur in the short-term. Economic growth in the United States has been on hold for the last two months, partly because of stock market drops.

In August, industrial production declined after seven consecutive months of growth. And in September the ISM index (managerial growth expectations) fell below the 50-point mark, consumer confidence ended its upward trend and retail sales where lower than expected.

THE BRIGHT SIDE

I expect the U.S. recovery to gain momentum in the coming months as a result of the expansive fiscal and monetary policies. The first indications of this are already visible--for the first time in several quarters, some companies have begun reporting better results than expected. Such was the case of General Motors, Citigroup and Bank of America. Meanwhile, Dell Computer revised its quarterly estimates upward. Even so, other firms such as Coca-Cola and Motorola continue to report disappointing results and shrinking their projections. Evidently, obstacles remain at the corporate level.

With regard to the ongoing threat of war with Iraq, there are two main scenarios. The first is that a U.S. strike occurs within the next few weeks, causing a sudden, but temporary, hike in oil prices. The second and most likely scenario is that an attack on Iraq is postponed until the U.S. economy begins to grow solidly again, which might not occur until the second quarter next year. Until then, oil prices are likely to slide until the situation develops.

Brazil's central bank had to raise the overnight Selic rate from 18% to 21% to offset financial volatility. The immediate effect will be an increase in the cost of money. On the positive side, Brazil has begun to register trade surpluses as a result of the continuing weakness of its currency.

BACK HOME

It seems that the Mexican government has successfully avoided a threatened strike at Petroleos Mexicanos (Pemex) and that the economy is gradually recovering. The latest local industrial production figures show a real growth of 0.7% figures during August compared to the same month last year.

By sector, there was 0.1% growth in the manufacturing sector, and 2.9% in the construction industry.

Meanwhile, inflation targets have caused much controversy in recent weeks. It's shouldn't be terribly worrying that inflation may ring in at a slightly higher rate than Banco de Mexico expectations, given that it is already at acceptable levels.

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Martin Lara (martin_lara@prodigy.net.mx) is a Mexico City-based independent financial analyst.
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Author:Lara, Martin
Publication:Business Mexico
Geographic Code:3BRAZ
Date:Nov 1, 2002
Words:525
Previous Article:Grading gov't. (Business Climate).
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