Most major stock markets weakened for the week ending 30th June 2003 as investors maintained their cautious outlook for the second half of 2003. The highlight of the week was the US Federal Reserve (Fed) decision to cut its benchmark interest rate cut by a quarter of a percentage point to 1.00% p.a., its lowest level for the past 45 years. The cut was less than the half-percentage point that Wall Street expected. The Fed also indicated that interest rates are expected to remain at the prevailing level for a long time and it kept its options for an additional rate cut should the macro-economic conditions deteriorate. Looking ahead, the Fed cited some positives for the US economy, including new signs of ?a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing.? Analysts view this easing move is in contrast with the Fed?s action during previous business cycles, whereby it would usually increase interest rates pre-emptively, long before inflation (economic growth) starts rising again. The Fed move was viewed more as an insurance against deflationary risks and hence may pave way to a sustainable global economic recovery scenario.

Mixed signals from the US economy

Last week, the widely-followed equity index, the Morgan Stanley Capital International (MSCI) World equity index eased by 1.1% for the period under review. The US Dow Jones Industrial Average (DJIA) Index slipped by 1.0%, while the technology-rich Nasdaq composite index moved in the opposite direction, rising by 0.7%. For the first half of 2003, the Nasdaq rallied by 21.5% and stood out as one of the top performing equity indices. Germany?s Dax, the DJIA and Japan?s Nikkei climbed by 11.3%, 7.7% and 5.9% respectively since the beginning of 2003. The US economy continued to send mixed signals. A report indicated a 0.3% drop in durable goods orders questioned the sustainability of the capital spending rebound. The Conference Board reported that its monthly index of consumer confidence, which had risen in April and May, was flat in June. The Chicago Purchasing Managers index, which monitors business activity, slipped in June. On a positive note, initial job claims fell to a three-month low and the low mortgage rate continued to boost the housing market. Sales of new and existing homes exceeded analysts? expectations in May 2003. Stronger personal income and spending figures for the month of May also provided some encouragement for Consumer America. Home improvement chain Home Depot and electronic retailer Best Buy rose by 3.8% and 2.2% respectively during the week under review. In Europe, the Dow Jones Stoxx 50 Index, which tracks Europe?s 50 largest companies, dipped by 0.8% amid weak US manufacturing data. News of improved business sentiments in Western Germany for the second consecutive month boosted investors hopes that Europe?s biggest economy may show some recovery in the second half of the year. German stocks jumped by 1.1% during the period under review, while the French and British stocks edged lower by 1.1% and 1.4% respectively. Another encouraging report was Japan?s June Tankan Business Confidence survey which showed that sentiment rose to minus 5 from minus 10 in March, suggesting the world?s second-largest economy may dodge a fourth recession since 1991. The news prompted gains among technology, real-estate and banking sectors. Expectations of a US-led global economic recovery also helped in renewing confidence in Japanese stocks. However, the Japanese Nikkei 225 index remained in negative territory for the week, down by 0.6%.

Contribution by Confident Asset Management Ltd