Fed rate cuts, modest rally

USA

The U.S. market moved higher after a federal judge approved most of Microsoft's antitrust settlement with the government. Financial stocks staged a strong performance, as the market reflects the Federal Reserve's latest decision to cut interest rate by 50 bps.

Congressional election victory of the Republican Party could pave the way for USD33.5bn in tax break and subsidies for the oil, gas and other traditional energy producers.

Drugmakers could benefit from possible reduction in prescription drug coverage under the Medicare Health Insurance program. Defense spending would also increase. These should bode well for the related stock sectors.

Meanwhile, the weak economy still weighs on investors'
confidence. Recent release of key economic numbers suggested that the economy might lose momentum in 4Q. The October Conference Board Consumer Confidence Index dropped to 79.4 from 93.7 in September. The jobless rate rose from 5.6% in September to 5.7% in October. These reports suggested that Americans are starting to worry about their job security and falling income.

Consumer spending accounts for two-third of the economy and the sluggish sales could be a drag to the economy. Job losses are on the rising trend, as a number of companies such as Lucent Technologies, JP Morgan Chase and Lucent have recently announced layoff plans.

According to Thomson First Call, analysts have lowered their forecasts for S&P500 4Q earnings growth from 19.9% to 16.9%. However, aggressive restructuring of U.S. companies could help improve operating margin, which if successful, could lead to a new wave of hiring and capex plan in the U.S. by 1H 2003. Therefore, likelihood that U.S. economic growth could re-accelerate from 2Q 2003 remains.


Europe

European companies are buying less new equipment.
Spending by companies in the Euro countries on new
machinery has dropped by 0.7% in October. Investors are
not convinced that the recent market rally could continue
without strong earnings support.

In France, the October Business Sentiment Survey declined from 97 in September to 94, meaning that business confidence has worsen. The Budget Minister expects GDP growth to ease from 1.2% to 1.0% in 2002. The government has announced a series of measures for 2003 with the aim to lighten the expense burden of employers as a mean to stimulate investment and
counteract the unemployment trend.

In Germany, factory orders for September has dropped by
0.5%. Volkswagen AG, Europe's largest carmaker saw its net income fall by 51% in the third quarter. The economic
outlook appears cautiously optimistic. The Economics and
Labor Minister has announced 2003 GDP forecast of between 1.4% and 1.7% while the average number of unemployed is expected to stay at around 4.1mn.

In the U.K., Marks & Spencer Plc, the country's largest
clothing retailer is expecting slower consumer spending.
Factory production in Britain has dropped by 0.4% in
September. Economists are predicting production growth to remain flat in the coming months. The share price of Rolls Royce has advanced as it could make USD30mn of profit from the supply engines to Air China alone.


Japan

The Nikkei ended the week with a slight gain, backed by
decent performance of the exporters, as the market believed that lower borrowing cost would help spur consumer demand in the U.S. The Japanese economy deteriorated further, as industrial production dropped by 0.3% m-o-m rise in September.

Manufacturers are planning slower production for the coming months as the U.S. economy slows. September unemployment rate was at 5.4%, which is close to its record level. Investors are hoping that the government might further clean up the country's bad debt laden banking system.

According to the Nikkei English News, the Financial Services Agency in Japan has proposed that the Finance Ministry should lower tax on stock disposal, stock dividend and investment trust dividend to 10% for the next 10 years. If implemented, this could encourage individual investors to buy stocks.