Nightmare on Wall Street

By STEPHEN DABKOWSKI AND BRIAN HALE Saturday 1 September 2001

Gloom has descended on Wall Street, and its aftershocks were felt locally yesterday as the spectre of a sharper global economic slowdown took its toll on investors.

The Dow Jones Industrial Average slipped below the psychologically important level of 10,000 points yesterday to take its retreat this week to 4.6 per cent. It pushed the local benchmark All Ordinaries Index down 1.5 per cent to 3217.8.

Increasingly, signs are emerging of a retreat by United States consumers from being the only bulwark against a worsening economic downturn in the US that would have severe ramifications for the rest of the world.

Deutsche Bank, in its briefing note to investors yesterday, asked the question: "Does equity carnage spell (US) recession?"

"Does the breakdown in stocks point to a deepening US slowdown - a recession over coming months?" said Deutsche Bank's global analyst Mark Jolley.

While he believes falling share prices on Wall Street isn't necessarily an accurate guide to future economic conditions, he does believe if it goes on it will scare US consumers.

"Equity carnage may well lead to loss of confidence and accentuate the slowdown, if it continues, but there is little to suggest that it is predicting deepening recession," he said. "That will require a consumer collapse because the US industrial production cycle will struggle to do anything but recover from here."

The growing gloomy outlook in the United States was reflected in strong gains in US bond prices and a four-day slide that sank Wall Street's most-watched sharemarket indices back to their levels not seen since April.

The triple-point dive for the Dow Jones Industrial Average yesterday of 171.32 points (1.7 per cent), its third in a row, sliced it to 9919 points.

The Nasdaq Composite Index surrendered another 51.49 points (2.8 per cent) to close below the 1800-level for the first time since April 9, and the S&P 500 Index stumbled 1.7 per cent.

America's woes were reflected across Europe, where all the indices fell despite a long-awaited 25-basis-point cut in interest rates by the European Central Bank.

Economic growth in the dozen nations sharing the euro will be below 2 per cent, ECB president Wim Duisenberg said yesterday, after a 3.4 per cent gain last year. The US economy will expand 1.25 per cent to 2 per cent, the US Federal Reserve forecast in July, down from 4.1 per cent last year.

European stocks are feeling the pressure. The Dow Jones Euro Stoxx 50 Index has fallen 3.2 per cent this week and so far this month, 400 billion euros ($A687 billion) has been wiped off the value of stocks in the 600-member Dow Jones Euro Stoxx Index.

In Australia, stocks posted their biggest one-day loss in two months as investors followed the overnight lead from Wall Street.

Falling commodity prices and concerns about the global economic outlook weighed heavily on traders.

The All Ordinaries Index has lost almost 100 points during the week as blue-chips including News Corp, Telstra, Rio Tinto and BHP Billiton continue to struggle against the tide of negative sentiment.

Brokers Salomon Smith Barney slashed its earnings forecasts for resources companies such as BHP, which slumped 2.8 per cent as copper and aluminium prices - commodity bellwethers - trade around their lowest levels since June 1999.

Market leader News Corp fell 3.4 per cent to $15.18, its lowest level in five months. The media giant, which accounts for roughly 10 per cent of the Australian market, is tied down by concerns about earnings growth in the US. Thursday's decline in US stocks followed a report from the US Commerce Department that Americans' personal income rose by 0.5 per cent in July.

That's almost twice as much as expected, but their spending was only half as much as expected - increasing by a mere 0.1 per cent, the slowest pace for nine months.

Economists put a brave face on the numbers, but even optimists such as Salomon's Melanie Jani warned that "there are risks to the outlook as consumers remain weary", while maintaining the firm's outlook for third-quarter consumer spending even though consumers are "off to a weaker start than thought".

Reports also suggest the International Monetary Fund is about to warn of a significant danger of global recession with a deep and protracted global downturn similar to those of the early 1980s and early 1990s.

For the first time in more than 20 years, economic growth in all of the world's major economies are diminishing at the same time. Even in the early '90s recession, the US, Europe and Japan did not slump at the same time.

International concerns were acknowledged by the European Central Bank when it cut rates on Thursday, saying the economic slowdown in the US is "larger, deeper, and lasting longer" than previously anticipated.

The rate cut, its second this year, comes as Europe's economy slides towards recession, although investors are concerned the rate cuts across the globe may not be enough to boost corporate earnings in Europe or America this year.

"September is going to be awful," said Andrew Spencer, asset manager at J.P. Morgan Asset Management in London. "We're going to get lots of profit warnings. Interest rates may be falling, but earnings are falling faster."

In Australia, the Reserve Bank will announce on Wednesday whether there will be another cut in interest rates.

Market sentiment has shifted in recent days to include the prospect of another rate cut to compensate for the slowing world economy.

However, the release yesterday of the July retail trade figures, which were stronger-than-expected, once again had the analysts re-evaluating their outlook on interest rates.

The data showed retail turnover grew by 1 per cent in the month, compared with forecasts that it would be flat in July.

"The jump in July retail sales sets up the strong start for the third-quarter household consumption spending in GDP," said HSBC senior economist Anthony Thompson.

He said the rosy outlook for Australia's domestic industry was further enhanced yesterday by the announcement of a 13.3per cent leap in motor vehicle sales in July.

Thompson says yesterday's data adds to the "other indicators in demonstrating an accelerating domestic economy".

"That's why Australia's growth prospects are being insulated from the broader world economic slowdown," he said.

"With indicators of the most interest-rate-sensitive sectors of the economy going great guns (housing and consumption), core inflation near the top of the Reserve Bank's target range, and net exports continuing to contribute to growth despite a global slowdown, it is difficult to see any convincing rationale for an RBA rate cut next week."

But not everyone agrees.

Tony Meer, Deutsche Bank's senior economist, says there isn't a domestic argument for a rate cut in Australia, but the RBA will still play a role in a globally coordinated approach to help ease economic woes.

"Central banks around the world must be increasingly concerned about the self-reinforcing threat of simultaneous economic weakness, and have determined (either explicitly or implicitly) to do something about it," he said.

"This determination has seen a raft of central bank action over the past month, the most recent instalment coming from the ECB, and we expect the RBA to follow suit," Meer said.

In the United States, a raft of other negative news continues to hurt investors.

The total tally of US Internet companies going out of business or declaring bankruptcy since January hit 642. Discount broker Charles Schwab announced a fresh round of lay-offs, cutting as many as 2400 jobs (11 per cent of its workforce), and the first of the major third-quarter earnings warnings appeared.

Sun Microsystems warned that its earnings and revenue would not match expectations, with weak sales in Europe and Japan likely to result in a loss for the quarter.

The technology sector, already beaten by the ongoing consumer news, was bowed by the earnings confession from one of Nasdaq's five most actively traded stocks.

Sun's shares lost 18 per cent yesterday, and the rest of the technology sector went south because it is one of the first large-cap tech companies to provide an update following June-quarter results. The severity of its warning was seen as an omen for the rest of the sector.

Many analysts believe the future state of the world economy seems to have come down to mind games, and whether ongoing stimulus can encourage the US consumer to keep spending.

This week, the US economy was saved from data showing it slipped into reverse in the second quarter, largely because American consumers had kept putting their hands in their pockets.

The economic growth was anemic - just 0.2 per cent in the June quarter, revised down from 0.7 per cent - and the statistics showed US business investment in equipment and software fell at a 15.1 per cent annual rate in the quarter, the fastest in more than 20 years.

The US Federal Reserve is due to cut rates again when it next meets on October 2. It has already slashed its target for overnight bank loans seven times this year, by a total of three percentage points, in an effort to prevent a recession.

"Everywhere you look there's still bad reports coming, with more and more news of job cuts," Chris Mahony, fund manager at J.&W. Seligman & Co, said this week. "No wonder consumer confidence is faltering.

"If stocks don't turn around soon, consumers may get really disappointed and stop spending."

On Tuesday, the Conference Board said August US consumer confidence took an unexpected step backwards amid rising concerns about the state of the employment.

To be sure, the US economy continues to face an uncertain path towards recovery.

Economists and policy makers still continue to expect that $US38 billion ($A71 billion) in tax rebate cheques and 300 basis points worth of Federal Reserve rate cutting should power a return towards the potential growth levels by early next year.

The best that can be said at this point? Stayed tuned.

- with JAMES CHESSELL and BLOOMBERG

http://www.theage.com.au/business/2001/09/01/FFXEMNAV0RC.html

-- Martin Thompson (mthom1927@aol.com), August 31, 2001

Answers

I'm staying tuned.

-- LillyLP (lillyLP@aol.com), September 01, 2001.