Weekly Market Review
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In a week short on positive news for US stocks and the economy, stocks continued to slide on relatively high volumes. Concerns over further terrorist attacks added to the gloom. There was a slow of bad news from corporates; it was Pfizer’s turn to be hit with accounting concerns while expectations for profits were lowered for IBM, Best Buy, GE, Apple and AMD. Finally, dollar weakness while good for US corporates in the medium term was perceived a sign of significant portfolio shifts away from US assets.
- European markets continued to take their lead from the US. Like the US, the news on the economic and corporate front was poor. Business confidence in Italy was unexpectedly poor and Nokia’s view on handset volume growth was disappointing. Complicating factors for European stocks were the strength of the Euro that makes exports to the US less competitive and lowers the Euro value of US Dollar revenues. Finally, Eurozone inflation remains stubbornly high, which raises the possibility that the ECB may raise rates even in the face of a weak world economy.
- The defensive characteristics of the UK market were not much in evidence last week. An end of week rally saved the market from being one of the worst performers. The insurance sector was the worst performing sectors on fears that continuing equity market weakness would affect solvency margins. Abbey National continued its slide after its profit warnings and the future of the CEO was questioned. Market sentiment was not helped by the revelation that Vodafone’s CEO, Chris Gent, is in line to get a very generous remuneration package at a time when the shareholders are taking a bath.
- The Irish market went the way of other markets on the week: down. Financials were weak largely on weakness of European financials. The main news for the week was that there might be a competing bid for Jefferson Smurfit, which caused the stock to advance modestly. Waterford Wedgwood fell to a nine month low on concerns over the US consumer and a declining US dollar.
- Japanese markets continued their slide last week as investors focussed on the lack of any follow through on reform of the economy or the financial system. Reduced expectations regarding the US economic revival hurt exporters and tech stocks alike. Additionally, the strength of the Yen negatively impacted exporters and while BOJ intervention provided short relief, investors were concerned that the problem was Dollar weakness rather than Yen strength. The Topix is now 12% off its recent high.
- Index Moves: Dow –2.33%; S&P –1.80%; NASDAQ –4.24%; Stoxx50 –1.3%, CAC –1.13%; DAX –1.66%; FTSE –0.55%; ISEQ –2.3%; NIKKEI –5.19%; TOPIX –4.92%.
BOND MARKET
Bond markets had a volatile week with yields eventually finishing with significant losses. Volatility was caused by continued weak equity markets, increased Mid-East tensions, wild fluctuations in foreign exchange markets and mixed economic data.
- European bond markets found support from falling CPI data within the Eurozone (now at 2.0%), weak industrial production and continued strength of the Euro against the dollar. However the US bond markets still managed to outperform the European markets on the week.
- Going forward, with real rates at 40-year lows in the US, their budget has slipped from a massive surplus to deficit. The dollar has fallen 8% on a trade-weighted basis and mortgage rates have fallen some 65bp. I feel the likelihood of a double dip in the economy is extremely low and indeed I feel a year from now, mid 2002 will be seen as the great asset allocation opportunity of all time.
CURRENCIES
The US Dollar’s slide continued last week. The currency lost 2.7% of its value against the Euro. Something resembling a vicious circle has begun which starts with the investors selling US assets on fears of falling values causing the Dollar to be sold which in turns fuels fears over the value the Dollar resulting in further selling. It is noteworthy that foreigners have been net sellers of US bonds as well as equities so far this year.
- The Yen continued is ascent against the ailing Dollar. The perception is that current accounts issues are akin to the inexorable pull of gravity on currency values, while the effect of the asset related flows that supported the Dollar for so long are now waning. The strength of the Yen is causing much anxiety in Japan and the BOJ has intervened to try to stem the rise but to little avail.
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