Wall Street' s nerve fails

USA

The Dow struggled to stay above the 10,000 level as economic reports startled investors. The Institute of Supply Management Index unexpectedly fell to 53.9% in April from March's 55.6%, versus a 55.3% forecast.

Jobless rate spiked to an 8-year high. Defensives and consumer stables outperformed while techs and telecoms were hard hit. Techs faced unrelenting selling pressure from impatient investors who perceive that a rebound in capital spending continues to get pushed out.

Tech companies like Dell conceded stagnant product demands casts uncertainties over their earning outlook. Plagued by deteriorating profitability, telecoms were hurt by expectations of credit downgrades. The NASDAQ recorded its lowest close since October 9, despite the Semiconductor Industry Association reported that worldwide sales of semis rose 7.2% in March from February levels, the highest monthly rise since April 1986.

It is important to note that the transition from recession to recovery is accompanied by ambiguous signals. Clearly the economy is on the mend as shown by the best month-over-month increase in semiconductor sales in almost 16 years. Also, the Supply Management Index clearly show signs of recovery, particularly in manufacturing, since factory output is rising as inventories are being restocked..


Europe

The ECB's no rate change decision was not helpful as earning concerns hurt sentiment. Telecom equipment manufactures were hit as Nokia and Ericsson plunged on fears of falling profitability as capital spending is unlikely to revive soon. Analysts' downgrades and unexpected fall in earnings hurt telecoms.

Deutsche Telekom fell after VoiceStream, its US wireless unit, said it had taken a $3.8bn charge in the first quarter due to accounting changes. Vodafone fell after it restated sales and earnings figures for its German and Italian divisions, formerly
known as Mannesmann.

Helped by their earnings reports, banking and oil stocks extended recent gains as investors sought out safe havens away from the volatile telecoms and technology sectors. Deutsche Bank noted 1Q pre-tax profit rose an as expected 39%, boosted by 1 bn of sales of shares in both Allianz and Munich Re. ABN Amro said net profit excluding exceptional items rose 12.9%, which met analysts' forecasts. UK oil major Shell Transport rose on the back of better-than-expected results.


Japan

The Nikkei rose 0.1% amidst quiet trading in the Golden Week holiday-shortened week. The rising JPY depressed the exporters whilst the sliding U.S. techs and telecoms spooked Japanese techs and telecom equipment manufacturers. Investors were muted to the Bank of Japan's decision to keep its ultra-easy monetary policy unchanged.

Markets analysts said investors have started to shift their money to Japanese equities amid growing confidence over a recovery in the Japanese economy and fears of further declines in U.S. stocks. Japan's industrial production rose for the second straight month in March, thanks to brisk exports of electronic machinery and automobiles. Bucking the downward market trend, Honda Motor climbed, benefiting from its upbeat earnings announcement on Friday.

News flow on the economy and earnings should continue to be encouraging in the next few months, which should reinforce the rally in cyclicals. However, significant strength beyond the cyclicals appears unlikely. That should limit the market's upside as signs of drivers (government reforms, solutions to the banks' problems, real restructuring and significant M&A) are still lacking.