A very volatile period for stocks

USA

U.S. stocks were extremely volatile last week. The market was initially down on poor corporate news but managed to recoup all the losses in the last two days to post a modest gain.

The catalyst came from a changed market perception that the Iraqi war will start and end quickly. Technology industrials and financials led the market to rally, given that these sectors are most geared for recovery.

Naturally, bellwether stocks such as Microsoft, Intel, General Electric, United Technology, Citigroup and AIG performed well. On the other hand, economic data have remained less supportive, casting doubts on a sustainable market upturn.

This bullish posture is unlikely to be derailed by economic news in the very near term. For now, many investors - faced with other unattractive investments - still prefer equities for investment and have fears that they may miss the market turnaround.

This market psychology is understandable given that stock market has already tumbled to such a low point so that the next move is more likely to be up.

First, analysts have been lowering profit forecasts in the first two quarters this year to more attainable levels. Second, most bellwether stocks are showing strong resistance to selling pressure.

Third, a swift victory of Iraqi war should speed up business investment. Aggressive fund managers, therefore, have started to take investment/trading positions for that scenario to play out. Fourth, central banks may still cut interest rates if required. meeting tomorrow, while the consensus is looking for a change in policy bias to weakness.


Europe

European markets trashed on disappointing earnings reports and forced liquidation early last week. Deutsche Telekom and Vivendi Universal reported record losses.

Insurance companies such as AXA, Allianz and ING were reportedly pared equity holdings and cut dividends. The market, however, managed to bounce back strongly after a climatic sell-off in mid-week.

The DJ STOXX 50 and 600 indices closed the week up by 4.4% and 4% respectively, rising from six-year lows on Wednesday. In the last two days, other major stock indices also soured, posting the largest weekly gains this year.


Japan

Japanese stocks touched a 20-year low and closed slightly
lower last week. The market did try to bounce back on hopes of more government market support. Mizuho Trust & Banking rallied on reorganization and raising new capital.

However, other major banking stocks such as UFJ Holdings and Sumitomo Trust were down on fears of large write-off and capital financing. Investor also shied away from companies that have close business ties with the giant banks on concern that they may have to participate in such capital raising.

Major exporting companies neither fared better. Toyota Motor, and Sharp Corp. declined on weak U.S. consumer data. Some investors are concerned that U.S. consumer demand may start to slow in the coming months. There were reportedly fund rotating from the export to domestic sectors.