Rising tide of regulation makes king hit as global pessimism starts to peter out

Friday 6th July 2001

The third quarter is getting off to a slow start for sharemarkets. In the US, June's rash of profit downgrade warnings has dampened sentiment, but July is an earnings reporting month so the mood may lift if profits are not a total disaster.

The main focus will be on how soon return to stronger earnings can be expected and it could be that the worst is over stateside. Unemployment figures were not quite as bad as feared and the consumer sentiment index has picked up.

However, interest-rate stimulus due to cuts by the Federal Reserve appear to be fading as a theme given that the last Fed funds rate reduction was only 0.25%, suggesting official US rates may be at or near bottom of the stimulatory cycle.

The US sharemarket will be slow this week due to the Independence Day holiday and glitches with the Nasdaq's computer system.

The Nasdaq index has improved steadily, nonetheless. US commentators forecast July will be a rising month for stocks, which may have bearing on other sharemarkets depending on their position in the economic cycle.

Europe appears to be still slowing down before it bottoms out, and reforms proposed for the Japanese economy will probably prolong recession.

July is the testing month for reform in Japan as senate elections occur.

Public opinion seems to back the LDP's reform proposals despite risk of higher unemployment but the Japanese economy will probably get worse before it gets better whether or not reform proceeds.

In New Zealand the sharemarket was disappointed by the Reserve Bank's decision to leave the official cash rate static at 5.75%.

Local interest rates now carry a significant premium over other countries', which may rally the kiwi and attract some more foreign money into New Zealand Stock Exchange listings.

However, with uncertainty hanging over the economy as the export sector cools and an interest-rate regime aimed more at cutting inflation than stimulating the economy, the outlook for local company profitability is likely to darken.

Sharemarket activity could be dampened by new takeovers legislation effective from July 1.

A preliminary decision by the Commerce Commission that listed Auckland International Airport possibly overcharges could damage the stock if price controls impair profitability.

Of broader concern if price controls are imposed is that there are other NZSE listings that might be monopolies or near monopolies.

Ports and electricity sector companies could fall under the shadow of the Commerce Commission's findings.

The sharemarket is becoming more regulated but whether that equates to improvement remains to be seen.

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