US markets on a roller coaster ride

United States

The U.S. markets had a roller coaster ride last week. SEC probe on Citigroup and JP Morgan Chase pulled the DJIA down as much as 6% after the index had suffered big losses in previous week.

A strong Wednesday rebound with very strong volume came in to the rescue, followed by a better than expected consumer sentiment index that helped markets to sustain Wednesday's gain. However, technology stocks performed relatively poorly after several industry leaders (BellSouth, TSMC etc) guided down their profit forecasts for 3Q.

Many companies have reported their 2Q results. So far, more than 70% of S&P 500 companies have reported their earnings with 57 more to go this week. Overall, results have been positive as over 60% of results announced were above expectation and just 12% of them were below consensus.

The focus has shift to 3Q earnings, which have been revised down. The consensus S&P 500 3Q growth rate (q/q) has been cut in half in the last six month from 30% to about 15%, indicating analysts are less optimistic about the 3Q.


Europe

European markets fell last week after profit warnings from Alcatel and Saint Gobain and Ericsson's rating cut to junk status from Moody's. Insurance companies led the past week's declines in Europe, reflecting concern that they might be unable to meet capital requirements after lower share prices have reduced the value of their holdings.

In addition to the overall weak equities sentiment, German IFO survey fell in June, well below market consensus, which partly explained German DAX's underperformance relative to major global markets. Germany IFO institute is scheduled to release its economic forecasts for this year and the next on Thursday.

Earnings reports in the coming week may provide more volatility. Results are due from Vodafone, Europe's largest mobile-phone company, Deutsche Bank and Royal Dutch Petroleum.


Japan

Japanese stocks tracked the U.S. markets as the Nikkei closed below 10,000 on July 24 for the first time since February 20. Brokerage, electronics and retail sector were among the worst performing sectors while banks and construction sectors posted gains.

Foreign investors were again net sellers in the third week of July, for the fifth consecutive week. Foreign investors appear more risk averse as a result of steep decline in their home markets.

Looking ahead, apart from major economic reports from the U.S., the industrial production data and earnings reports from major corporations (Honda, Canon, TDK, Ricoh...) should play a big role in determining market direction.

In the technology sector, earnings reports on Tuesday from two leading chipmakers, Toshiba and Hitachi, will also be closely watched after Taiwan Semiconductor Manufacturing offered grim outlook for 2H.