Japan's elections could spell trouble for Wall Street
02:46 p.m Jul 12, 1998 Eastern
By Huw Jones
NEW YORK, July 12 (Reuters) - Investors will be watching corporate
earnings reports this week but the real news will be the uncertainty
created by the Japanese elections, which could be a big problem for Wall
Street.
Voters in Japan handed Prime Minister Ryutaro Hashimoto a devastating
electoral defeat Sunday that was certain to force his resignation and
could leave his plans to rescue Japan's economy in tatters.
Financial analysts forecast trouble for world stock markets when trading
resumed on Monday after the weekend break.
''I would suspect we're in for a rocky Monday,'' said Peter Cardillo,
director of research at Westfalia Investments.
''Obviously this is bad news for the stock market. It means a lot of the
economic package is going to be stalled.''
Hashimoto had struggled to push through a package of reforms, which now
appeared in danger of being delayed after the severe losses suffered by
his ruling Liberal Democratic Party (LDP) in Sunday's parliamentary
elections.
The vote also threw into doubt Hashimoto's scheduled visit to Washington
July 21 to brief President Clinton on his plans to pull Japan out of its
worst recession since World War II.
''I don't think this result is a positive scenario for markets.
Uncertainty is a bad thing and right now there is too much
uncertainty,'' said Ron Bevacqua, an economist at Merrill Lynch in
Tokyo.
''Earnings ... and the whole election in Japan, those are the two major
focal points,'' Harvey Hirshhorn, chief economist and investment
strategist at Stein Roe & Farnham, said before the results in Tokyo were
in.
Investors were already skittish Friday ahead of Japan's elections and
talks between Russia and the International Monetary Fund for a deal to
help shore up Russia's fragile economy. Talks between top Russian and
IMF officials failed to produce a multi-billion-dollar loan deal Sunday.
The Dow Jones industrial average rose 15.96 points to 9,105.74 Friday,
capping a gain of 80.48 for last week. The Nasdaq composite index set
its third straight record.
Market analysts said before the election that Japan's ruling LDP would
need to hold its ground or Hashimoto might have to resign. While that
would slow reforms needed to reverse Asia's slowdown, it could also
accelerate change, some analysts said.
''The market would like to see Hashimoto kicked out. The reform process
is being blocked by him, and just about anybody else would be better,''
said Courtney Smith, chief investment officer at Orbitex Management.
Stein Roe's Hirshhorn warned about expecting too many reforms from a new
Japanese government. ''I am sceptical they will do them, and if they do
them, I am sceptical they will do enough.''
Meanwhile, investors will be watching corporate earnings, which will get
into full swing this week. With major market indexes at or near record
levels, companies must meet or beat their earnings forecasts or
punishment will be swift.
''If you get some that come up short, it takes some of the wind out the
sails because the market is already up looking for good numbers,'' said
Marshall Acuff, portfolio strategist at Salomon Smith Barney.
The June quarter earnings season kicked off last week with good numbers
from General Electric Co., but profit warnings from Du Pont Co. and
others worried some investors. Companies due to report this week include
Intel Corp., J.P. Morgan & Co., Johnson & Johnson, Ford Motor Co. and
Eastman Kodak Co.
Profit growth for big companies is expected to be little better than in
the first quarter, when it was the weakest in more than six years. That
makes the outlook for earnings in the second half of the year crucial.
''Earnings could put a ceiling on this market over the next six to 12
months,'' Hirshhorn said.
With inflation and long-term interest rates at their lowest in decades,
this week's economic data, barring major surprises, will be of passing
interest. June's Consumer Price Index and retail sales are due Tuesday.
(Wall Street Desk, 212-859-1737) |
