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1997-99: REVIEW AND OUTLOOK

1998 Scene Setters

January 04, 1998

Here are some of the key players and issues facing world financial markets in 1998:

THE FED: ITCHY TRIGGER FINGER?

Were it not for the Asian crisis, Federal Reserve Board Chairman Alan Greenspan almost certainly would have raised the central bank's key short-term interest rate, now 5.5%, in recent months. The Fed, after all, has been worrying out loud about the U.S. economy's robust advance and extremely tight labor markets. If Asia's situation settles down in the first quarter, and if the U.S. economy fails to show convincing signs of slowing, Greenspan may quickly reprise his role as the stock bull market's nemesis by threatening a rate increase.

JAPAN: IN NEED OF A FAST FIX

Investors seem to be at their wit's end with the Japanese government. The Nikkei-225 stock index fell to a 2 1/2-year low by late December as worries mounted that Japan still doesn't have a viable plan for bailing out its sickly banks and rejuvenating its financial system after seven years of trouble. Time may be running out: Some analysts warn that if faith in the system isn't restored soon, stock prices could dive further, worsening the health of the banks by slashing the value of their equity holdings--and in turn driving them to sell shares, creating a vicious downward spiral.

CHINA: ASIA'S SAVIOR?

While the rest of East Asia suffers from crashing currencies and stock prices, China's protected currency--still only partially convertible--remains intact. What's more, China's huge foreign currency reserves (built up from years of trade surpluses with its neighbors and the West) should help it weather the Asian economic storm in the short run. The big question: Will the Chinese government speed its own economic and banking system reforms to place the economy on sounder footing--and potentially in position to help pull the rest of Asia out of its funk later in 1998 or '99?

ROBERT RUBIN: NEW DEMANDS FOR LEADERSHIP

Though the Clinton administration initially underestimated the severity of Asia's financial crisis, Treasury Secretary Robert Rubin has once again taken a leadership role, as he did in the midst of Mexico's economic crisis of 1995. But Stephen Roach, economist at Morgan Stanley, Dean Witter, Discover & Co. argues that the extent of Asia's debacle, and the speed with which it spread, "puts the onus squarely on global policymakers to come up with creative new strategies for crisis containment." That will mean more pressure on the United States for help, which means more pressure on Rubin. For now, Rubin's leadership is helping to keep the dollar strong--which should keep the United States an attractive destination for foreign investors.

EUROPE: WAITING FOR UNION

EMU, to Europe, isn't a flightless bird, but rather a long-awaited event that European leaders hope will allow the Continent's economy to finally reach its true potential. European Monetary Union is scheduled for Jan. 1, 1999. Although the concept of a unified currency for participating nations will have limited application initially, the drive toward EMU is expected to bring European interest rates into convergence and, potentially, spark much more cross-border economic activity.

COMMODITIES: FALLING AGAIN

Key commodity prices slumped in late 1997 as production surged, while worries about slowing Asian growth depressed the demand outlook for such items as copper, grains and oil. Gold was among the biggest losers, falling to 12-year lows of less than $290 an ounce. The latest commodity decline continues a pattern of weakness that has persisted since commodity markets' heyday in the late 1970s. But if lower prices are bad for commodity producers, they are a boon to many countries' economies, and to financial markets, by keeping raw-materials costs down and thus suppressing inflation.

THE TECH SECTOR: BLIP OR BIG TROUBLE?

Technology stocks were hammered in the fourth quarter by concerns that Asia's woes would slash the industry's growth prospects. Many Silicon Valley analysts called the reaction overblown, but key stocks remain well below their record highs. Bellwether Intel Corp., for example, ended 1997 at $70.25 a share, a full 31% below its peak price of $102. What happens with tech stocks in the first quarter is of more than passing interest to Wall Street: Because the sector has been such an important market leader in the 1990s, a collapse of expectations for tech companies' growth could be a body blow to the bull market.

Source: Times staff

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Nikkei

1997 close: 15,258.74

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Commodity Research Bureau / Bridge Index

1997 close: 229.14

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