Morgan Stanley 1999 Annual Report Download - page 26

market and economic conditions, as many non-U.S. regions con-
tinued to recover from the difficult conditions that existed during
the end of fiscal 1998. However, throughout fiscal 1999, there were
persistent indications that U.S. economic growth was proceeding at
a brisk pace and at a higher rate than anticipated. Such indica-
tions, coupled with the tight domestic labor market, increasing
wage pressures and the renewed vigor in international markets, led
to fears of accelerating inflation. In an effort to slow the U.S. econ-
omy and to mitigate inflationary pressures, during fiscal 1999 the
Federal Reserve Board (the “Fed”) raised the overnight lending rate
by 0.25% on three separate occasions and also raised the discount
rate by 0.25% on two separate occasions. Such increases reversed
the Fed’s interest rate actions that occurred in the fourth quarter of
fiscal 1998, when it lowered the overnight lending rate by a total
of 0.75%. At the conclusion of fiscal 1999, the Fed announced
that it was adopting a neutral bias toward interest rates. However,
there still remained much uncertainty as to whether additional
interest rate actions would be necessary in the event that indica-
tions of inflationary pressures continue to persist in the future.
Conditions in European financial markets also demon-
strated signs of recovery in fiscal 1999. European financial markets
benefited from positive investor sentiment relating to the European
Economic and Monetary Union (“EMU”). EMU commenced on
January 1, 1999 when the European Central Bank (the “ECB”)
assumed control of monetary policy for the 11 European Union (the
“EU”) countries participating in the EMU. Since its inception, the
euro has emerged as a new funding alternative for many issuers.
During the first half of fiscal 1999, European financial markets
were adversely affected by the severe economic and financial tur-
moil that developed in Russia, Asia and certain emerging market
nations in late 1998. These developments contributed to lower
levels of exports and a sluggish rate of economic growth within the
region. In response to these conditions, both the ECB and the Bank
of England lowered interest rates in an effort to stimulate economic
activity. During the latter half of fiscal 1999, the prospects for
improved economic performance within Europe increased due to
indications of recovery in the levels of manufacturing output and
exports in Germany, the region’s largest economy. European eco-
nomic prospects also improved due to increased consolidation and
restructuring activity across the region, the ongoing recovery of
global financial markets and a lower interest rate environment,
although concerns of accelerating inflation led both the ECB and
the Bank of England to raise interest rates in the fourth quarter of
fiscal 1999.
Economic and financial difficulties have existed in the Far
East region since the latter half of fiscal 1997. The Japanese econ-
omy has suffered from its worst recession since the end of World
War II and has been adversely affected by shrinking consumer
demand, declining corporate profits, deflation and rising unem-
ployment. However, during fiscal 1999, there were indications that
the steps taken by Japan’s government to mitigate these conditions,
including bank bailouts, emergency loans and stimulus packages,
were beginning to have a favorable impact on the nation’s economic
performance. Certain financial markets elsewhere in the Far East,
such as in Hong Kong, Singapore and Korea, also began to demon-
strate signs of recovery during fiscal 1999 and have experienced a
marked rebound in economic activity. Although uncertainty still
remains, investor interest in the Far East region has generally
increased as a result of these improved prospects.
The worldwide market for mergers and acquisitions con-
tinued to be robust during fiscal 1999. The volume of global
merger and acquisition transactions achieved record levels and
contributed to record levels of revenues by the Company’s invest-
ment banking business. The merger and acquisition market
reflected ongoing consolidation and globalization across many
industries, particularly in the technology and telecommunications
sectors. During fiscal 1999, there also was a significant increase in
the volume of cross-border transactions, primarily driven by higher
levels of activity in the European merger and acquisition markets.
In addition, fiscal 1999 included some of the largest merger and
acquisition transactions ever completed. The markets for the
underwriting of securities also were positively impacted by the gen-
erally favorable market and economic conditions which existed dur-
ing much of fiscal 1999.
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