Greenspan Put very much alive

USA

The market continued to edge higher earlier last week on better than expected economic data. About 82% of the S&P 500 companies have already reported 2Q earnings.

While the earnings were not particularly strong on a currency-adjusted basis, they met and in some cases exceeded market expectations. This led to a growing market perception that the economy may accelerate in the second half year, which was also alluded to in Mr. Greenspan's semi-annual testimony.

The bullish market sentiment carried on until the release of July employment report last Friday. Unfortunately, the monthly report turned out not as strong as expected, reversing earlier market optimism and casting doubts on the economic prospect.

The sentiment was further set back after the ISM index rose less than expected. All the usual influential stocks traded lower with all indices posting losses: DJIA -1.4%, S&P 500 -1.86% and NASDAQ - 0.87%, the first small weekly declines since June.

The unexpectedly soft employment report may cause a deeper market correction in the near term, followed by a period of market consolidation. However, ample liquidity is likely to fuel interest in bottom fishing given the anemic return on money market funds. The recent sharp sell-off in bond market also tended to enhance interest in equity investment.

Most important of all, the 'Greenspan Put' is still very much alive with various Fed officials making it clear that interest rates will be cut if the U.S. economic recovery falters. The U.S. authorities are determined to reflate economic activities. This policy, in the near term at least, will boost market hopes and bode well for equity trading.

Europe

With the exception of the FTSE index, European markets managed to hold on small gains last week. A strengthened U.S. dollar has lent support to exporters since a weaker Euro makes European companies more cost competitive.

Royal Philips Electronics and Munich Reinsurance led the market advance. The German business confidence index rose for a third month in July, which could be a prelude to strong economic recovery. The market is yet to reverse its overly bearish sentiment.

The corporate reporting is now about half way through. BNP-Paribas, Imperial Chemical Industries and Schneider Electric topped analysts' forecasts. The indication is that a greater number of companies have reported better than expected earnings.

Japan

The Nikkei 225 index ended the week hovering just below the unchanged mark. Weak quarterly results from electronics giants such as Hitachi and Toshiba ignited profit taking in technology stocks.

By contrast the market saw gains from Mitsubishi Electric, the world's biggest maker of consumer electronics, on positve earnings results. Foreign investors were reportedly still buyers of Japanese equities in July, albeit at a slowing rate.

Whether this trend will continue is hard to tell but many global investors are still under-invested in Japanese equities. The recent flow of economic data seemed to indicate that the worst slump has been over. The issue is really how long the stock market doldrums will last.

We are of the view that the pace of corporate restructuring is still slow and earnings visibility will remain low for a while. Given such outlook, external factors will continue to drive the stock performance at least in the short run.