US markets at the crossroads - Views on News from Equitymaster

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US markets at the crossroads

May 12, 2001

It was introspection week on the Wall Street after the economy gave mixed signals. Some strong economic data signaled that interest rates might not go much lower. Both the NASDAQ and Dow ended lower by 4% and 1% respectively over a week. Rising corporate lay offs and falling stock prices failed to affect consumer sentiment. Retail sales in April rose by 0.8%, higher than estimated 0.2%. The consumer sentiment index too rose to 92.6 in May from 88.4 in April. The jobless claims for the week ended May 5 fell by 41,000 to 384,000, which was lower than 425,000 reported in the previous week. This numbers boosted hopes that the worst for the economy is over.

However, there was some negative news also. The overall Producer Price Index (PPI), which is considered as a key gauge of inflation at the wholesale level, was up by a marginal 0.3%. This was less than the expected 0.4%. The worker’s productivity in the first quarter also fell by 0.1%, raising fresh concerns about the slowing economy.

This week Cisco reported a disappointing financial performance. Its sales dropped by 30% QoQ and posted a loss of US$ 2.7 bn (the first ever loss in its history). The company also signaled a negative outlook for the networking equipment business. It is also expecting flat topline growth in the fourth quarter. On the other hand blue chips companies including Wal-Mart and Gap Inc. posted encouraging earnings figures. General Electric also forecasted solid profit growth in the first quarter. These results cheered the markets to an extent.

(Price in $) 5-May-01 12-May-01 Change
Rediff 2.8 3.0 8.0%
ICICI Bank 6.3 6.6 4.8%
Silverline 4.0 4.1 2.5%
Dr. Reddy's 12.1 12.0 -0.4%
Satyam Infoway 4.1 4.1 -1.0%
VSNL 13.7 13.4 -2.2%
Infosys 72.5 70.3 -3.1%
ICICI 11.3 10.8 -4.4%
Wipro 36.6 33.6 -8.1%

Tech ADRs were out of favour in line with the NASDAQ trend. Wipro was the major loser. Infosys’ statement that it is not expecting a quick recovery in demand from the US economy created weakness in the tech ADRs. The company also indicated that it would be very difficult for them to increase billing rates in the near term.

Rediff and ICICI Bank were the major gainers. Rediff had witnessed a significant sell-off in the last one month. Although the counter managed to attract buying interest, it was traded with low liquidity. ICICI Bank was gaining in the expectation of interest rate cut in the Indian markets. Also increase in FDI limit in the Indian banking sector to 49% from the earlier 20% fueled the demand for the stock. (The FII limit in the bank had already touched 20%.)

The US markets are at crossroads since there are no immediate triggers. The news on earnings and growth is expected to remain negative atleast till the end of second quarter. However, the recovery in the economy and corporate profits are not ruled out till the end of this year. All eyes are on the Fed’s meeting on May 15, ‘01, which will play an important role for the market trend.

(Price in $) 5-May-01 12-May-01 Change
Rediff 2.8 3.0 8.0%
ICICI Bank 6.3 6.6 4.8%
Silverline 4.0 4.1 2.5%
Dr. Reddy's 12.1 12.0 -0.4%
Satyam Infoway 4.1 4.1 -1.0%
VSNL 13.7 13.4 -2.2%
Infosys 72.5 70.3 -3.1%
ICICI 11.3 10.8 -4.4%
Wipro 36.6 33.6 -8.1%

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