The Ripple Effect of Globalization

greenspun.com : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

The Ripple Effect of Globalization

Mitchell Martin International Herald Tribune Saturday, July 7, 2001 U.S. Firms' Warnings Worsen Downturn in World Markets NEW YORK The brutal side of globalization came to the fore Friday, as the world's financial markets were rattled by signs that slowing economies were taking a toll on corporate profits.

This latest bout of weakness was precipitated by profit warnings Thursday evening from two high-profile American companies in the computer field - the chipmaker Advanced Micro Devices Inc. and the storage supplier EMC Corp. - that depressed prices at technology companies in Asia when trading began on Thursday. The fallout from those warnings continued to be felt through European trading and into North American time, as almost every major stock market index in the world fell.

The Nasdaq composite fell 75.93 points, or 3.65 percent, to close at 2,004.18, while the Dow Jones industrial average fell 227.18 points, or 2.17 percent, to 10,252.68.

The main stock indexes in Western Europe fell 2 percent to 3 percent, except for the FT-SE 100 in London, which fell 1.25 percent.

"What we are seeing is one of the consequences of globalization," said Michael Gerding, who runs international growth-stock portfolios for Denver Investment Advisors LLC.

"We are seeing the consequences of the fact that global economies are more closely tied than they ever have been," he added. "Particularly when the biggest of the engines, the United States, slows down, it is very hard for people to hide from that."

The news from AMD and EMC hit the markets in Seoul and Tokyo especially hard, with key indexes in each falling by more than 2 percent, and also depressed currencies in Eastern Europe, Turkey and Brazil, the last weighing more on Argentina's stock market than that of Sao Paulo. Because Argentina's currency is linked to the dollar, the falling real in Brazil, its biggest trading partner, makes its products seem expensive in comparison.

Brazil announced Thursday that it would buy $6 billion of its currency in a series of small interventions for the rest of the year. It has recently been trying to prop up the real with earlier purchases. "Certainly the fact that Brazil has intervened heavily and it does not make a difference does not help much," said Rosemary Sagar, head of the global investment division of U.S. Trust Co.

The Merval index in Buenos Aires fell 1.1 percent and the Bovespa in Sao Paolo fell about 1 percent.

The pressures on the Argentine economy resounded throughout the world's emerging markets as investors took their money elsewhere. The fear is that Argentina might be unable to service its $130 billion debt. A default could discourage investors from holding stocks or bonds in other emerging markets.

Even more acute was the situation in Turkey, which is at odds with the International Monetary Fund over whether it has undertaken sufficient reforms in its banking and telecommunications sectors to qualify for promised aid. On Tuesday, the IMF froze $1.56 billion of loans, pending a resolution of the issue.

The Istanbul Stock Exchange's National Industrial Index fell 5.7 percent on Friday. Calculated in dollars, the barometer is down 46 percent for the year.

Turkey's problems weighed on other countries that are seeking to enter the European Union. The Polish zloty and Hungarian forint were among the most pressured, though stock prices in Warsaw and Budapest were only marginally lower. Still, the effects of previous declines and the weak currencies have taken their toll. Warsaw's main indexes is down 27 percent for the year, while Budapest's is down 18 percent.

In Western Europe, the major markets were still reeling from Marconi PLC's announcement Wednesday that its operating profit would fall by 50 percent for the year ending in March 2002 and sales would be down 15 percent, reflecting falling orders for its telecommunications gear.

Although the North American telecommunications market has been ravaged, the Marconi announcement illustrated that Europe was not immune to overinvestment in the sector.

Underlining the global nature of investments in that sector, shares of Telecom Italia Mobile SpA on Friday fell 4.5 percent in Milan on worries over the value of the company's holdings in Brazil.

Worldwide, about 100 million miles of fiber optic cable and associated transmission equipment have been installed over the past few years to satisfy demand for Internet-related communications, and telecom companies paid $125 billion to buy wireless licenses in Europe. While sufficient demand may one day emerge, the huge amount of investment was not justified by current economic conditions, and the sudden realization late last year that many companies had put too much money into the sector contributed to the rapid slowing of the world economy.

The areas most impacted were those in the technology arena as spending was cut. The profit warnings from AMD and EMC illustrated this problem and took their tolls Friday on other technology providers.

Asian chipmakers that were hit by the AMD warning included Hynix Semiconductor Inc., the Korean company formerly known as Hyundai Electronics, whose stock fell 6.7 percent. In Tokyo, shares of Hitachi Ltd. fell 3.5 percent.

Suppliers to the chip industry have also watched their orders dry up. Shares of Advantest Corp., a Japanese company that produces equipment that semiconductor manufacturers use to test memory chips, fell 8 percent in Tokyo.

The ripple effects were also seen Friday in a report from Malaysia, which said industrial production fell 3.7 percent in May as electronics manufacturers, including foreign semiconductor companies with operations in Malaysia, responded to the downturn.

Meanwhile, on Wall Street, the problems were compounded by rising U.S. unemployment, reflecting businesses laying off workers to compensate for slowing sales. Unemployment rose to 4.5 percent in June, the government reported before trading began and 114,000 jobs were lost, mostly in manufacturing.

The United States is in the same position as Argentina vis-a-vis Brazil, with a strong currency making its factories uncompetitive with those in other regions.

When traders were given the opportunity to react to the Thursday earnings warnings, they did so with a vengeance. EMC and AMD lost more than a quarter of their values in late trading. EMC fell $8.43 to $21.60 and AMD fell $7.84 to $20.80. Marconi's American depositary receipts, which began the week at $7.48 and the year at $20.56, fell 30 cents to $3.05.

One ray of hope, according to Ms. Sagar of U.S. Trust, is that with the second quarter ending, earnings warnings are likely to diminish, as companies with bad news to report generally try to get it out of the way before the profit-reporting season begins a few week after the end of the quarter, she said.

http://www.iht.com/cgi-bin/generic.cgi?template=articleprint.tmplh&ArticleId=25320

-- Martin Thompson (mthom1927@aol.com), July 07, 2001

Answers

Ankle bone connected to the jaw bone.

-- Uncle Fred (dogboy45@bigfoot.com), July 07, 2001.

This is a fine article. It is very enlightening.

-- LillyLP (lillyLP@aol.com), July 08, 2001.

<< The pressures on the Argentine economy resounded throughout the world's emerging markets as investors took their money elsewhere. The fear is that Argentina might be unable to service its $130 billion debt... >>

Re: Argentina, there was a report on National Public Radio this morning about the imploding economic conditions there. [It may now be available in print or as audio at www.npr.org, I haven't checked.] Apparently, many people have the option of getting second passports for Italy and Spain, and the number of Argentinians doing so has sky- rocketed recently. Italy in particular allows dual citizenship for people whose grandfather was an Italian citizen, if I understood the radio report correctly.

It's not clear that all these Argentinians will actually emigrate back to the land of their ancestors, but they are at least seeking the option. As noted in the report, people are acting more as modern "customers" of their nation rather than citizens: if they don't like what's offered, they are at least considering moving their "business" elsewhere (I guess this is a version of the "flight to quality" option we heard about pre-Rollover).

Of course, in today's globalized world, there may not be too many safe places to run when things unfold all the way...

-- Andre Weltman (aweltman@state.pa.us), July 09, 2001.


National Public Radio report on Argentinians seeking to emigrate:

URL (long, because it's via their web search engine): http://search1.npr.org/search97cgi/s97_cgi?action=View&VdkVgwKey=% 2Fopt%2Fcollections%2Ftorched%2Fme%2Fdata%5Fme%2Fseg%5F125575% 2Ehtm&DocOffset=1&DocsFound=101&QueryZip=Argentina&Collection=zeus&Col lection=C1&Collection=WEB&SortSpec=Modified+Desc+Score+Desc&ViewTempla te=docview%2Ehts&SearchUrl=http%3A%2F%2Fsearch1%2Enpr%2Eorg% 2Fsearch97cgi%2Fs97%5Fcgi%3Faction%3DSearch%26QueryZip%3DArgentina% 26ResultTemplate%3Dsimplesearch2%252Ehts%26QueryText%3DArgentina% 26Collection%3Dzeus%26Collection%3DC1%26Collection%3DWEB%26SortSpec% 3DModified%2BDesc%2BScore%2BDesc%26ViewTemplate%3Ddocview%252Ehts% 26ResultStart%3D1%26ResultCount%3D10&

"This segment is from Morning Edition

Monday, July 09, 2001

Listen to Segment

Listen to Entire Show

View Program Segments

Argentine Emigration

For hundreds of years, immigrants from Europe have come to the New World for its economic opportunities. But Argentina's continuing recession is leading some of their descendents to decide that was a mistake. NPR's Martin Kaste reports from Buenos Aires on those Argentines who are backtracking in the hope of a better life... in the Old World. (4:54) "

-- Andre Weltman (aweltman@state.pa.us), July 10, 2001.


Moderation questions? read the FAQ