A 'sickening plunge' ahead?

Markets: A sickening plunge ahead - at Moneyweek.co.uk - the best of the week's international financial media.

Major stockmarkets "hit turbulence in a big way" last week, says Michael Morgan in the FT. Tokyo plunged by more than 5% and Hong Kong lost 4% on Thursday. These declines, the worst since 12 September 2001, were triggered by disappointing corporate results on Wall Street and exacerbated by profit-takers. Britain's FTSE 100 fell by 2.6% in just two days, as Wall Street faltered and the prospect of impending interest-rate rises raised the spectre of a fall in lending, consumption and house prices. Global jitters subsided later in the week, with America's S&P 500 index finishing 1% down.

The trouble with this US earnings season is that although many companies are beating expectations, the market is "priced for perfection", says E S Browning in The Wall Street Journal. With the S&P 500 at 29 times earnings, hopes are so high that "anything short of a breathtaking earnings report" disappoints - witness Microsoft's 8% slide following its forecast-beating profits performance, as investors seized on some evidence of weak sales to corporate customers. The market has finally noticed that strong third-quarter profits have been due largely to cost-cutting, not any pick-up in sales, says Alan Abelson in Barron's. And even now, sales rises look unlikely, since the third quarter's high GDP growth, far from heralding recovery, is a "blip". The economy has been "on steroids dished out by Uncle Sam": hefty tax cuts and cheap credit have all encouraged yet more spending. But the tax cuts have been spent and the "vast explosion" of mortgage refinancing is over. Even more ominously, bank lending has been shrinking and growth in M3, a broad measure of money supply, has fallen at the fastest pace in a decade.

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