To: Chip McVickar who wrote (2695 ) 8/24/2000 1:23:58 PM From: John Pitera Read Replies (1) | Respond to here is an interesting article that outlines that globalA major change of heart followed after publication of this week's German IFO July survey. The overall index fell for the second consecutive month and confounded widespread expectations of a rebound in the wake of parliamentary approval of the much trumpeted tax reform package. Although other German economic data are still broadly supportive of the economic recovery they are all backward looking. The IFO survey stands apart as being pre-emptive having successfully called the last two cyclical GDP troughs. once implementation of Germany's tax reform package gets underway. The corporate tax rate will be cut from around 52% to 39% from January 2001 whilst the top rate of income tax will be cut from 51% to 42% over the next five years. The biggest measure, concerning the abolition of capital gains tax, is set to herald a massive spree of corporate restructuring. Over the next five years it is estimated some $29 billion will be cut from tax bills. Added to this both France and Italy looks set to follow suit by implementing their own sweeping tax cuts. France, Germany and Italy combined attracted less foreign investment as a percentage of GDP than any other European nation according to the OECD with Germany and Italy ranking last . The temptation to create jobs abroad because of high taxes should therefore be reversed once these reforms begin to filter through. The trouble is that this process will take years rather than weeks to come about. So, whilst there are few doubts about the longer term prospects for European growth there is little to cheer about over the remainder of the year. US stocks could well stabilise and move back into higher gear. That suggests the prospective H2 slowing will not moderate enough to significantly change the prevailing landscape favouring dollar inflows. Added to this the Japanese economy is possibly shifting into higher gear. Although there is much contention over the sustainability of Japanese growth it seems likely that Q2 GDP, to be reported on September 10, will show a good positive result . Recent comments by LDP official Kamei underscored that a move to dollar/yen 103 could be tolerated. With both the dollar and yen looking reasonably well placed the euro is once again left as the poor cousin. The Merrill Lynch survey of 125 global fixed income fund managers provided further cause for concern . It suggested long term fund managers were heavily overweight euro denominated assets and, given the prospect of rising interest rates, there would be little buying interest. Apart from that the report also noted that the euro was being undermined by investment outflows from European equity markets along with a wave of European takeovers of foreign companies. Withstanding a modest correction towards the 0.9300 area, a test of the all time lows at 0.8850 is really only a matter of time. Losses to the eighteen month channel base around the 0.8400 area could ultimately be in store.
