Japanese equities, six-month high

USA

U.S. markets took a breather on Friday, as investors succumbed to profit taking after the University of Michigan index of consumer sentiment dropped to 87.2, compared to the expected 93.7 and the 92.1 recorded in May.

For the week, the Dow was up 0.6%, but S&P was up 0.08% and the Nasdaq was down 0.06%.

There was a slew of negative news in the market last week, including the finding by Federal regulator of accounting irregularities at Freddie Mae, sales warning from Motorola and Texas Instruments, as well as sluggish retail sales in May.

However, the stock market remained buoyant as investors continued to switch funds into the equities on expectation that the Fed will cut rates further after the Beige book showed slim signs of recovery. The Fed funds futures is pricing in a 100% chance of a 25b.p. rate reduction at this month's FOMC meeting.

Although the equity markets is not undervalued, as the benchmark S&P500 is now trading for about 19 times projected 2003 operating profits, nearly a quarter above the average price/earnings over the past 20 years, the current market valuations need to be compared against other investments, especially bonds, which offer pitifully low yield and are relatively overstretched.

This liquidity driven market may rally further before window dressing before the end of the June quarter, based on expectation of lower interest rates, fiscal injection and the prospect of a mild earnings recovery. The market is also expecting S&P earnings to rise by 6% in 2Q03 and then increasing 12% and 21% in 3Q03 and 4Q03 respectively.

According to a recent Barron's article, there is nearly $5 trillion sitting in low-yielding accounts at banks, thrifts and money-market funds that could start to make its way into stocks.

For the coming week, there will be readings for May on consumer prices, housing starts, industrial production and the Philadelphia Fed's index of manufacturing for June.

Financial firms Morgan Stanley and Lehman Brothers are also set to report their fiscal second-quarter results next week, together with retailers like Circuit City and Best Buy.

Europe

The European markets gained for the most part of the week before giving back some of the gains on Friday due to a worse than expected consumer confidence number from U.S.

Economic news is still very mixed for European markets, but ECB President Duisenberg dampened hopes of further rate cut in the near term in a Bloomberg interview.

In the near term, European stock markets will remain buoyant by the flush of corporate deals, such as Royal Bank of Scotland's purchase of Churchill Insurance from Credit Suisse and security firm Chubb's takeover by U.S. group United Technologies.

Handset companies suffered a triple whammy after Motorola kicked off with a warning on earnings forecast, followed by Nokia, the world's largest handset maker and Texas Instruments, the world's biggest maker of chips for mobile phones.

To summarise, the outlook for the handset and telecom infrastructure market remains challenging since operators continue to cut back spending as cash flow generation and debt reduction become the top priorities.

Japan

Japanese shares rose to a fresh six-month high last Friday, propelled by strong foreign interest in Japanese stocks as Money managers from U.S. and Europe are getting more bullish about the stimulus in U.S. and are chasing for returns from the laggard Tokyo market.

The strong market momentum is supported by a surge in volume. More than 1.98 billion shares changed hand on Friday, and it was the busiest day since February 1989. However, local pension funds are continuing with their program selling and the Nikkei-225 Index failed to hold gains above the 9,000-point level.

Shares of exporters like Toyota Motor, Canon and Kyocera, which were among the gainers last week, may give back part of the gains due to the worse than expected consumer confidence in U.S.