US equities find some cheer

USA

Equities rose on the release of weak jobs and
manufacturing data, heightening expectations that the Fed
will cut interest rates this week to provide impetus to a
slowing economy. Investors also welcomed the fact that the
economic data was not as dire as some had feared, which
boosted sentiment on Wall Street that 4Q could be positive
for equities.

The month of October saw the market averages successfully
retested their primary lows, a behavior that marked major
bottoms during 1962 to 1988. Also, based on history, fourth quarters might have a 77% chance of recording net gains after September showed net declines.

Therefore, such pattern mayrepeat itself. Fundamentally, 419 companies of the S&P 500 universe already reported their quarterly results, showing actuals were below expectations by 0.73% on average but still beat analysts' forecasts in early September.

So investors now refocus on the economic outlook. Sentiment models of some strategists remain upbeat on the market performance. Earnings yield model suggests that equities remain reasonably cheap when compared to bonds.


Europe

In Europe, earlier strength in stocks petered out after an
industry report showed manufacturing in the region is
shrinking, fueling expectations that corporate profit growth
will stall.

European manufacturing shrank for a second
month in October, as a faltering economy deterred capital
spending. Additionally, business confidence across the
Eurozone has further deteriorated, as expressed by the fifth
consecutive monthly falls in both Germany's IFO survey and France's October INSEE survey, which added another
element of uncertainty to Europe's equities markets outlook.

Telecoms stocks continued their slide in the wake of a sector downgrade on Thursday and a fresh downgrade on Vodafone by on Friday.


Japan

The Nikkei lost ground as the government succumbed to
pressure to water down the bank reform plan. The
Government said it would work with the Bank of Japan to
halve the bad-loan ratio at big banks by 2005, the deadline by which it had in any case already promised to solve the nonperforming loan problem.

A Reuters poll of 35 financial market experts revealed that while the reforms were seen as a step in the right direction, the Government's proposals to halve bad loans by March 2005 was highly improbable and its efforts to fight deflation not strong enough. Equities were given some support, however, on expectations that the Fed will cut interest rates next week to aid growth, helping Japanese exporters.

The government's watering down the bank reform plan has
diminished the chances of real change in Japan. New
initiatives on fiscal and monetary easing appear limited.

But at least the policy uncertainty has now been removed.
Fundamentals remain subdued as exports may already have
peaked out, which could bring forward the timing of an
economic downturn. Consumers spending indicators have also begun to turn down.