US banks on economic stimulus

Despite a positive statement from the United States Federal Reserve Chairman Alan Greenspan, and economists’ expectations of higher corporate earnings, share prices declined over the week but more or less held the post war rally gains with some measure of certainty. In general, the global market sentiment is looking for the well-timed and organised US-led stimulus efforts to foster economic growth and financial market gains. The Dow and S&P fell 1% but the NASDAQ was harder hit, having lodged larger gains over the last three weeks. Profit takers stepped in to sell off and the US-based tech index lost 2% over the week. The UK major market index fell over the week as well, dropping 19 points or 1/2% as gloomy economic news weighed on investor sentiment.  Life assurance and pharmaceuticals were the weakest sectors in the UK, while tobacco and general insurance made the most gains. In continental Europe, concerns over the strength of the euro against the US dollar weighed heavily on European equities during the week. The European currency reached fresh highs and breached $1.17, the rate at which it was launched in 1999.

Investors worried that the strengthening currency would hurt economic growth prospects, hamper exports and reduce earnings for companies in the region. At one point over half a year ago, we had offered an argument that the Euro would hit 1.20 by year end 2004. It now looks like that exchange rate will be hit this week. The German DAX index lost significant ground, down 2.9% for the week where as France fell more in line with the US indexes. In the United States, Alan Greenspan, the Chairman of the Federal Reserve, delivered a boost to the US markets, saying that it was not unreasonable to expect the economy to pick up in the second half of the year. He also commented that the risk of deflation appeared remote, however, the timing and extent of the pickup in economic activity was uncertain. We note that the Fed definitely took a very aggressive stance against the deflationary possibility in recent times. Unemployment in the US reversed its positive trend over the week, as 428,000 new applications for unemployment insurance were received for the week. The rise from last week’s figure broke three straight weeks of declines. The closure of factories, battered by tornados in the Midwest, were blamed for the increase.

US Tobacco companies received a big cheer over the week, as the Florida appeals court dismissed a verdict forcing firms to pay $145 billion in damages to 700,000 Florida smokers. The fine, which threatened earnings in the industry, was overturned after being judged as ‘grossly excessive’. The court also ruled that the cases should be treated individually and not collectively. More news on the US corporate front, the US clothing chain GAP announced that first-quarter earnings had more than quadrupled to $202.5 million from $36.7 million last year. The company said that sales had increased for its core products and this reduced the need for discounting. Home Depot, the world’s largest home improvement chain, reported that its first-quarter earnings had risen by 6% as sales remained resilient. Net income rose to $907 million from $856 million last year, as management kept costs under control.

The UK government confirmed GDP rose 0.2% in the first quarter, matching its preliminary estimate announced last month. However, retail sales, which have underpinned the economy, expanded less during April. The volume of sales rose 0.3% from March, compared with 0.6% in the month earlier. UK inflation remained at 3% in April. On the Continent, consumer activity continued to be weak, as worries persisted over rising unemployment and slowing economic growth. Confidence amongst Italian consumers reached its lowest level in six years, according to a survey by ISAE, and in France, consumer spending failed to grow in April. In contrast to many of its continental European peers, the French economy recorded modest growth of 0.3% in the first quarter of 2003, rebounding from contraction in the preceding quarter. Zurich Financial Services reported first-quarter profits of $114 million, helped by rising insurance premiums, particularly in its non-life business. Its management remain cautious but expect to report profits for 2003 following a $3.4 billion loss last year. In general, we remain comfortable with the economic developments and look forward to seeing business confidence and business spending figures to pick up in support of the general consumer position now entrenched.

e-mail: darcy@investments-intl.com