US earnings point to strong second half

USA

The stock markets have reacted rather mixed to the less than expected interest rate cut. Investors are to focus on the second quarter corporate reporting due to commence in early July.

Concerns are that the stock market has run ahead of earnings growth. Problems such as accounting scandal, high unemployment of 6.1%, and sluggish demand could constrain the economic recovery. We, however, think that both corporate earnings and economic growth are pointing toward a stronger second-half.

Economists are expecting low interest rate, and tax cut might lift third quarter economic growth to 3.3%. Besides, the Fed might lower interest rate again if the economy fails to improve in the near-term. Consumer and business demand are expected to pick up in the second half of
2003. Manufacturers' orders and production rebounded in May, according to the Institute for Supply Management.

Unfilled orders for non-defense capital goods excluding aircraft rose 0.4% in May, while inventories of durable goods fell 0.2% last month.

Europe

In the U.K., both Hanson and Unilever issued profit warnings over the past week. Investors are switching from building material and consumer product to retailers.

The Dixon Group gained on the back of improvement in U.K. consumer confidence. The Bank of England is likely to lower interest rate in middle of July to stimulate growth as the first quarter GDP only grow at 0.1%.

In France, consumer spending dropped 1.6% in May, due to weak demand for cars and the poor job market. Buyers have deferred their purchases to the summer sales season in July.L'Oreal and other cosmetics shares were under selling pressure after analysts downgraded the industry on concern of lower earnings growth.

The Finance Minister warned that economic growth might be weaker than the official 1.3% forecast. The budget deficit might exceed 3.4% of GDP as the government plans further tax cut next year.

The German market sought support from the rebound in business confidence. The Munich-based Ifo Institute suggests that West German business confidence rose from 87.6 in May to 88.6 in June. BMW rebounded, as the production of its 3- series models will resume in July, after workers of a key supplier agreed to suspend the walkout.

However, German's economic growth might still be weak as consumers are scaling back their spending, and unemployment rate stays at a 4-½ year high. The International Monetary Fund said the danger of deflation is 'high' in Germany. The government also plans to cut jobless benefit, simplify lay-off procedures and lower sick leave subsidies to cut the deficit.

To stimulate growth, the government is likely to bring forward income tax cut for 2004 and 2005. The plan is to lower the maximum personal income tax from 48.5% to 42%, and the minimum rate from 19.9% to 15% in 2004. Fears that Government might dispose of their strategic corporate investments have exerted pressure on stocks like Deutsche Telekom.

Japan

The N225 index trades between 8850 and 9100, as investors were confused by the mixed signals. Market sentiment was cautious, on concern of the weak economic growth and poor corporate earnings outlook.

Some economists have warned that the Japanese economy might shrink in the second quarter. Export of cars, trucks and buses dropped 5.8% in May due to sluggish demand from North America, according to the Japan Automobile Manufacturers Association.

Moody's Investors Service downgraded Sony's long-term credit rating from Aa3 to A1. It said Sony might take longer than expected to regain its previous strong profit and cash flow generation pattern.

On the positive side, output at Japan's factories, mines and refineries rose by more than expected in May. Sales at supermarkets, department stores, restaurants and other retailers rose 1.3%MOM in May, according to the Ministry of Economic, Trade and Industry. Consumer electronics sales increased 4.4%MOM for the same period.