Last week, major stock markets edged lower as investors adopted a cautious stance despite the release of generally positive earnings and economic reports. The closely watched Morgan Stanley World Equity Index dipped by 1.3% for the week ended Monday 4th August 2003. Both key US equity indices, the technology-laden Nasdaq Composite and the ?old economy? Dow Jones Industrial Average indices declined by 1.2% and 0.9% respectively. Among the major bourses, Japanese stocks (-3.9%) witnessed the sharpest decline during the week under review, despite news of receding unemployment. Stocks in France, Germany and Switzerland also mirrored Wall Street?s performance, dropping by 0.7%, 0.4% and 0.3% respectively. The FTSE 100, an index tracking the shares of UK?s top 100 companies, slipped by 1.2%.

In a recent report, US publisher Dow Jones & Co.?s indicated that the profitability growth American companies appeared to be picking up momentum. Dow Jones indicated that 1,251 companies out of the 1,500 companies in its US Total Market Index had reported earnings for the second quarter of 2003. Combined net income (unadjusted for exceptional items) for those companies jumped by 65.0% to $112.5bn, compared to $69.2bn recorded a year earlier. Companies that witnessed the sharpest boost in earnings were energy companies (helped by high oil and natural-gas prices) and finance companies (which benefitted from low interest rates). In the second quarter of 2003, US-based petroleum giant ChevronTexaco saw a 293% jump in net income, while profits of financial concerns J.P Morgan Chase and Merrill Lynch jumped by 78% and 61% respectively.

This earnings turnaround re-affirmed the scenario whereby the US economy may lead a global economic recovery in the second half of 2003. On the economic front, there are already increasingly positive signs heralding that the worse may be over. In the US, optimism is fuelled by the recent slew of economic data for the second quarter of 2003 (real GDP grew a larger than expected 2.4% p.a., capital and government spending rose by 7.5%) and the July reading of the ISM manufacturing index, which shot above the 50 boom/bust line. In a recent piece of research, US brokerage house Merrill Lynch expects the US economy to grow by about 3% for the second half of 2003 and to record a 3.3% growth in 2004, versus a 2.3% growth expected for 2003. Last week, the bond markets weakened as investors expect higher interest rates amid a healthier economy.

This anticipated pick-up in interest rates (as indicated by a 1.4% jump in the 10-year US Treasury yield since mid-June) is considered as harmful to the consumer sector. Higher interest rates may adversely affect mortgage refinancing activities, and slow down consumer spending. Consumers' assessments of current economic conditions, of conditions over the next six months, and of the employment outlook all declined.

Viewing potential weaknesses in consumer spending in the months ahead, investors avoided credit-sensitive sectors of the economy (such as homebuilders and mortgage lenders), retailing and consumer finance stocks. Shares of home-improvement chain Home Depot, electronic retailer Best Buy, mortgage lender Freddie Mac slipped by 2.5%, 3.7% and 4.6% respectively during the week under review.

Contribution by Confident Asset Management