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Fed flares up the US markets - Views on News from Equitymaster
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  • Jun 30, 2001

    Fed flares up the US markets

    The interest rate cuts had a positive impact on the US markets. Although, it was a delayed rally, sentiment turned bullish backed by an improvement in earnings outlook by the tech majors. Economy too signaled some signs of progress. The Dow meanwhile ended lower hurt by Honeywell Inc.

    It was a record week for the NASDAQ. The index ended in the positive territory for all 5 days. In the initial trading days the mood in the markets was mixed, as some of the leading corporates issued profit warnings. Merrill Lynch indicated the larger than expected drop in earnings (about 37%). Rising inventory problems forced Applied Micro Circuits to forecast a quarterly loss (below anticipated profits) and Xilinx warned 32% slump in first quarter profits. Palm Inc (which reported loss) and Oracle, on the other hand projected a turnaround in business by the year-end. Microsoft also contributed in positive sentiment, as the ruling for the split of the company is overturned.

    In the first quarter this year, companies profits contracted by 6.2% YoY, higher than 4.3% YoY decline in the fourth quarter earnings.

    Sighting a downturn in the industrial activity and economic weakness, the Federal Reserve announced an interest rate cut of 25 basis points to 3.75%. Although modest, the rate cut is expected to reinvigorate the sliding economy. The policy makers also left the door open for more rate cuts in future if needed. The six rate cuts announced by the policy makers during the year is reflected in some economic data. Personal consumption expenditure rose by a healthy 3.4% in the first quarter compared to 2.8% in the previous quarter.

    Dr. Reddy’s stays on the top
    (Price in $) 23-Jun-01 30-Jun-01 Change
    Dr. Reddy's 17.1 18.6 8.7%
    Silverline 2.8 3.1 8.2%
    Infosys 62.9 65.0 3.3%
    VSNL 13.7 13.4 -2.1%
    Satyam 9.0 8.7 -3.1%
    Rediff 2.1 2.0 -3.8%
    ICICI 9.7 9.2 -5.1%
    Wipro 30.0 28.0 -6.8%
    ICICI Bank 5.5 5.0 -8.5%
    Satyam Infoway 3.8 3.4 -10.1%

    Among the Indian ADRs, Dr. Reddy’s maintained its top position for the second consecutive week. Silverline and Infosys were the gainers among the tech ADRs, and Sify was out of favour.

    The Indian pharma major Dr. Reddy’s is attracting strong buying interest in the US markets backed by latest development going on in the company. FII limit has however reached 28% in the company and further buying of the stock requires RBI’s permission.

    Danish pharma major Novo Nordisk is planning to take one of the two diabetic drugs licensed to it by Dr. Reddy’s to the third stage of clinical trials. The market for both these drugs is expected to be around US$ 2 bn. Dr. Reddy’s could receive milestone payment when the drug goes into the third stage. The company has also obtained tentative FDA approval for its Omeprazole 40 mg capsules and Fluoxetine 40 mg capsules. Dr. Reddy’s estimated annualized branded sales for 40 mg Fluoxetine capsules at more than US$ 250 m and US$ 100 m for Omeprazole 40 mg capsules.

    Silverline was another star of the week. The stock was traded with huge volatility and managed to end higher by about 8%. The company has entered into a partnership with Intraspect Software, the leader in collaborative business, to provide clients with software based on Intraspect’s technology platform.

    ICICI group companies lost ground on concerns over Dabhol Power project, which is currently under the state of flux. Bank of Japan is planning to invoke the guarantees given by ICICI for the project. This could affect its future financial performance.

    The sentiment in the US markets this week was better than the past few weeks. Interest rate cut by the Fed has provided some direction to the markets, which were lacking a trigger. Going forward the eyes are on the first quarter results, which could influence the markets movements.

    NASDAQ on a roll
    Indices 23-Jun-01 30-Jun-01 Change
    NASDAQ 2,035 2,161 6.2%
    BSE 3,382 3,457 2.2%
    Nikkei 13,045 12,969 -0.6%
    Dow 10,605 10,502 -1.0%
    Hang Seng 13,174 13,043 -1.0%



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