Equity markets in free fall

USA

The FDA investigation into Johnson & Johnson's anemia drug Eprex and worse than expected earnings results from Ericsson and Sun Microsystems devastated the equities markets.

The DJIA suffered a 390-point decline on heavy volume Friday, breaking through its post-September 11 lows as investors lost confidence in stocks and corporate America. Investors chose to focus on negative news while ignoring positive news such as an improving trend of corporate earnings as 61.8% of those S&P 500 companies that have reported quarterly earnings were above expectations while 11.5% were below.

Despite the negative sentiments fostered by corporate scandals, both the economy and corporate earnings are moving in the right direction. The Federal Reserve forecasts GDP growth of about 3% during the second half of this year and 3.5-to-4% during 2003. With growth at or below potential through 2003, the central bank expects inflation to remain low and steady.

The real economy continues to grow, in line with higher trend productivity growth. Interest rate sensitive sectors remain extremely robust, mitigating declines in equity wealth. The U.S. inventory production is in good position especially with production rates below ongoing demand.

Capital spending appears to be bottoming in aggregate, despite severe weakness in some segments. The drop in the dollar is a benefit for export-oriented industries. Based from reports from about one-third of S&P 500 companies, operating EPS seems to be more than $12 on a GAAP basis, or about $0.50 more than the bottom-up consensus. Also, operating earnings rose more than 30% on a year-to-year basis, and reported EPS advanced by more than 100% from a very low base that includes large writeoffs.

Europe

Gains on Wednesday and Thursday were erased in a day of selling after some weak earnings reports from leading U.S. and European stocks. Technology stocks were hardest hit after weak results and a hugely discounted rights issue from Ericsson.

Weakness in U.S. computer hardware company Sun Microsystems which forecast a 1Q loss also hit European techs like STMicroelectronics and ASML. Epcos issued severe profits warning. Infineon reported 3Q results in line with estimates but warned pricing pressures in 2H.

European exporters also came under further pressure after the euro rise against the dollar reached a 30-month high. Drug stocks were firmly lower after U.S. peers declined. Easing momentum of the U.S. economy definitely put a damper on the recovery in the Eurozone region.

In common with the U.S., plunging equities markets could undermine the consumer and in turn economic growth, which will likely increase the equities risk premium.


Japan

The Nikkei 225 sank with heavyweight technology shares leading the way after a series of dismal earnings reports and lingering accounting worries knocked their U.S. peers.

Sony tumbled on concerns over an economic recovery in the U.S., Japan's biggest trade partner. Other computer-related companies were also under pressure after Microsoft scaled back its earnings estimate for fiscal 2003, raising doubts over a recovery in the world's personal computer industry.

Technology research firm Gartner Group said in its latest report that the worldwide shipments of personal computers totaled 29.9 million units in the April-June quarter, down 0.6% from a year earlier.

Exporters were also hurt by a rising JPY as USD/JPY fetched 115.90 in late afternoon trade in Tokyo. The greenback has fallen more than 3% since the start of this month, or more than 12% in the last three months, on the back of rising uncertainty over the U.S. economic recovery.