Japanese equities perk up

USA

U.S. stocks rallied last week on strong buying in technology shares. Expectations and reality have started to clash last week and the resulting market reaction was mixed.

On the negative side, Yahoo!, one of the strongest gainers in the past two months, posted stronger than expected earnings Wednesday, but expectations ran so high for the Internet media giant that the stock slipped and didn't get back up for the rest of the week.

On the bright side, Kohl's, one of the fastest growing department chain stores, lowered its earnings expectations Thursday as it tried to unload inventories and posted weak same-store sales. However, analysts issued heartening words regarding the company's second-half outlook and the stock proved resilient, ending the week up 10%.

Investors also shook off disappointing earnings guidance from General Electric on Friday. The stock only eased 0.3% after the company narrowed the range of its profit estimates towards the lower end, saying it now expects to earn between $1.55 to1.61 a share this year, down from a previous range of $1.55 -1.70 a share. That represents just mid single-digit growth over 2002.

Natural gas prices continue to retreat from the high of about $6.5/mbtu when Greenspan commented about a potential natural gas crisis. Trading as low as $5/mbtu, the August natural gas futures reacted negatively last week to a massive build up in inventories for the week ending July 4 and Greenspan's new comments.

In the latest weekly EIA report, U.S. natural gas storage moves up to 1,773 bcf, which is 13% below the eight-year average, improving from a 40% gap seen at the start of the season. Greenspan testified before the Senate Committee on Energy and Natural Resources on natural gas last week and tuned down his concerns.

He said that natural gas prices so far have had a 'minimal' effect on the economy. He also cast doubt on a research by the Federal Reserve Bank of Dallas that suggested doubling of natural gas prices could reduce U.S. GDP by 0.6%. Supply outlook appears improving as latest report showed U.S. rig count in the first half increased 19% over the same period a year ago.

The passage of the Asbestos reform bill in the Senate Judiciary Committee helped pushing up many property/casualty (P&C) insurance stocks last Friday. Although the bill is subject to a final passage in the full Senate meeting, news flow has turned positive and should offer near term support to most P&C insurance stocks.

Due to their lagging performance compared to other financial stocks and attractive valuations, we favor overweighting P&C insurance stocks. In the technology sector, focus will be on SEMICON WEST 2003, which is held in San Francisco this week.

It features investor meetings by most of the major semiconductor capital equipment companies and serves as an important gauge for sentiment and expectations going into the second half year.

Although companies should highlight their ability to generate margin improvement and leverage to earnings following massive cost cutting efforts in past quarters, focus will likely be on booking growth.

We believe analysts have priced in much of the aggressive growth assumptions as some bullish analysts expected 20-30% booking growth in the semiequipment space for the second half year. Therefore, we are cautious on semi-equipment stocks in the near term.

Europe

European stocks rose last week on strong buying of technology related shares on optimism that demand for technology-related products is rebounding from a three-year slump. Companies accounting for almost two-thirds of the value of Dow Jones Stoxx 600 technology index will announce earnings during the coming week.

Among the biggest components, Nokia, the world's biggest mobile-phone on Friday. Royal Philips Electronics NV, Europe's thirdlargest producer of semiconductors, and ASML Holding NV are scheduled to report on Tuesday and Wednesday. Following the strong rally since March, the trailing dividend yield for DJ Euro Stoxx 50 has dropped to 3% from 3.7%.

However, at the same time, short-term interest rates have continued to fall. As a result, the current proxy Europe short rate of around 2.7% is now below the yield that can be obtained from equities.

Japan

Japanese stocks rose for the second week on better than expected economic data. Following BOJ's Tankan report, last week's machinery orders and Economy Watcher index showed greater-than-expected recovery.

While the Japanese market has rallied strongly driven by strong foreign buying as we expected, the short-term overbought technical conditions suggest some consolidation could occur before another leg up. Net purchases by foreign investors in the first week of July were the highest year to date and 12th straight week of net purchases.

However, unwinding of cross-shareholdings is expected to increase after general shareholders' meetings at end of June. Share sales by banks, insurers and non-financial corporations all picked up in recent weeks.