Ghost of Black Monday returns

USA

Adding to Qwest's criminal investigation, the latest accounting woes come from Merck, Bristol-Myers Squibb, and Procter & Gamble.

Wyeth also faces a class-action lawsuit brought by women taking its hormone replacement drug, Prempro. Study of Prempro treatment was halted because of health concerns. Legislation that could ease generic competition also added to concerns over drug makers' earnings.

Retail stocks were mixed after June same-store sales were released, but later traded weaker on an unexpected drop in the University of Michigan index of consumer confidence.

We re-iterate our positive stance on oil stocks. OPEC's production control and the start of U.S. driving season should bode well for the supply/demand condition. Valuations of major oil stocks are undemanding, both in terms of their historical trends and in comparison with the broader market's. The core pick is Exxon Mobil.

Europe

Alcatel slumped after Moody's cut its credit rating to below investment grade on concern over continued weakness in telecom equipment demand. ASML and STMicroelectronics were sold off as a major broker reduced its earnings forecasts for worldwide semiconductor spending.

Potential exists in stock exchange companies. European exchanges saw strong volume growth in June, thanks to high market volatility, which bolster volume in both the cash market and derivatives trading.

Eurex and Euronext.liffe are the main beneficiaries, posting robust volume growth for index products. Risks to revenue estimates appear to be on the upside, as volume data are running ahead of estimates across the exchanges. We prefer Euronext, the value play within the sector. It was formed through the merger of the exchanges of France, Belgium and the Netherlands and now ranks the second largest behind the London Stock Exchange.

Japan

While shares are looking increasingly undervalued, buying interest will still count on foreign investors, as appetite from domestic investors is weak. Unfortunately, foreigners' buying is also limited for the time being.

The decline in the U.S. stock market tends to restrain purchases of Japanese shares because of the positive correlation between the two markets. Therefore, a recovery in the U.S. stock markets should herald a sustainable advance in Japanese equities.

Domestic demand-oriented stocks may continue to attract interest if U.S. stocks continue to decline and JPY continues to strengthen. But, we expect lackluster movement for the overall market, due to the fragile domestic recovery and continued disorder in policy making.

Asia ex Japan

Given current return forecasts, Singapore market is about 15-20% undervalued relative to its fair price-to-book valuation. However, it lacks the growth drivers to propel consistent market gains.

Recovery on the economic front is still weak. Non-oil domestic exports are still struggling to register positive growth. The Purchasing Managers' Index is range-bound, close to its neutral 50% level, suggesting neither deterioration nor improvement. Industrial recovery hinges on global demand, while domestic demand is miserable amid high unemployment. The government's tax breaks have been unsuccessful in boosting local consumption.