The bulls are faced with tough times, thanks to concerns pertaining to high inflation, rising input costs and earnings deceleration among other factors.
It all started with the US subprime problem and the global credit crunch, which led the BSE Sensex nosediving from its peak of 21,206 on January 10, 2008 to 14,677 on March 18. A part of the fall can also be attributed to the concerns pertaining to the increase in crude oil prices and its impact on India's economic growth.
Some of the early signs were also visible from rising inflation and the slowdown in domestic industrial production numbers. This further led to concerns over high interest rates, slowdown in GDP and thus, corporate earnings as well.
Sensing these developments, foreign institutional investors (FIIs) were the first ones to move out of the market, and they partly became the reason for the markets to fall.
End of the bloodbath?If the global and domestic problems persist, experts predict the Sensex to fall to 12,000-14,500 levels. Though bold and unbelievable, there are few players who are predicting that the Sensex may touch the 9,000 levels.
While we are not predicting the Sensex levels, we jot down and bring certain factors that may determine the future course of the markets and what investors should do during these uncertain times.
Crude realitiesNo investor will be willing to invest in an asset headed for reporting lower profits and no asset can be profitable if costs are higher than realisations.
Crude oil is one such commodity, whether it is the economy (macro) or corporate profitability (micro), which is considered to be the source of most of the problems.
While crude oil prices had corrected to $125 levels, after crossing $135 a barrel mark, it again scaled a new peak of $139.12 a barrel last week. There are reports predicting that it will go to $150 to $200 a barrel.
There are several reasons attributed to the recent spike in the crude oil prices including increased financial investments and a marginal rise in costs of oil production.
Whether the crude oil price rises to such high levels or not, experts suggest that the good old days of cheap oil may be gone for a long time to come.
Bloating deficitAccording to studies, a $10 increase in the crude oil prices may reduce India's GDP growth by about 0.3 percentage points and an increase in the consumer price index by 1.2 percentage points.
India imports about 70 per cent of its oil requirements, suggesting that at current levels, it will have to pay a significantly higher amount to meet demand. It has already led to a large trade deficit (over 7 per cent of the GDP).
Fiscal deficit, which is currently at about 3 per cent of the GDP, could reach to 10 per cent levels if the fertiliser, food, farm and oil subsidies are added.
Hence, further rise in crude oil prices will only make things worse. Not only this, rising oil will have serious consequences on others things as well.
"If crude oil touches $150 levels and sustains there, it will be a crude awakening for the global as well as for India. India's annual import bill will touch to $140 billion against the $78 billion estimated for the FY08," says Devendra Nevgi, CEO and CIO, Quantum Mutual Fund.High inflationHigh crude oil prices would have a sweeping impact on the Indian economy.
To put forth some of them: Higher inflation rate, rupee depreciation, increasing trade account and fiscal deficit, and firm interest rates. The other side of an oil shock would probably the ensuing political instability and social unrest.
The inflation rate, which is already high at over 8 per cent, could emerge as a key concern. Economists share different views with regards to inflation reaching the double digit figure in the short term, and if not, it could range at about 7-8 per cent, especially after the recent hike in the petrol and diesel prices.
"We are yet to see the cascading effect of recent spike in oil prices, and the recent hike in fuel prices will further translate into higher inflation in the weeks to come. We think the inflation rate is heading towards 9 per cent levels, however it will ease out in the later part of the year," says, Anand Krishnamurthy, Co-Head Global Markets, HSBC.
Experts observe that the high oil prices will further increase the cost of goods and not to mention, the logistic costs itself, which is expected to go up by another 10-15 per cent as most of the truck operators have increased rentals.
And to join the league, we have already seen airlines companies increasing the fuel surcharge by 15-20 per cent on the ticket price.
So, either the companies will have to increase the prices of goods sold or services rendered or they will have to take a hit on margins. This will certainly lead to overall cost push on other sectors and may discourage the consumer spending further. In both the cases, either the sales volumes will come down or margins thus, lower earnings for companies. (Click here for tables)
Interest rate worriesOne of the objectives of the monetary policy in India has been achieving price stability, which the RBI may try to achieve even at the cost of giving up growth. If inflation spirals, the RBI may also raise either the CRR (cash reserve ratio) or the repo rate, depending on the prevailing situation.
The RBI's comfort level for inflation rate is 5.50 per cent, whereas the current level is 8.24 per cent. As there are worries over the rising interest rates, the economist also predict higher interest rates, which along with other factors would shave off around 50-75 basis point from the GDP growth rate.
"It seems that the economy will slow down, closer to its long term average of around 6-7% for the next decade. Higher inflation and rising crude oil prices remain a risk to the Indian growth story," says Devendra Nevgi.
Earnings slowdownThe high interest rates along with the factors like inflation and higher commodity prices will hit India Inc negatively. The domestic cost of capital has already increased, with the prime lending rates having gone up by 175 basis points since the second half of 2006 to 12.5 per cent currently.
Also, the housing loans have become more expensive, while in many of the cases the banks are charging about 18-22 per cent for the two wheeler and personal loans. As a result of this, the bank credit growth has come down to about 24 per cent as against the recent high of over 30 per cent in January 2007.
This will not only hit the banks' income growth, but also hit the companies immediately, due to higher interest outgo and slow down in the consumer demand. The early sign of this is seen in the slow down in industrial production to 5.8 per cent during the quarter ended March 2008 compared to over 10 per cent a few months ago.
The lag effect is also felt by the companies. According to estimates, sales growth of a cluster of 1,524 companies, excluding oil and gas and finance companies, was 14 per cent year-on-year (YoY) during the quarter ended March 2008 as against the recent peak of 28.9 per cent YoY growth during the quarter ended September 2006.
Analysts expect this trend to continue going forward if the various issues, as mentioned above, remain.
"We think the Sensex earnings growth will slow down in FY09 mainly on account of margin pressure across the sectors led by input costs of power, coal and other raw materials. Also, higher interest rates and slower credit growth should pressure the banking sector," says Harendra Kumar, head research, Centrum Broking.
"Yes, moderation in earnings is quite visible. With increase in input costs (of materials, human resources and capital) margins are also under pressure. We have seen decline in margins of companies from the IT, automobiles, engineering, capital goods and logistics sectors" Says Bhavesh Shah, VP Research, Asit C Mehta Investment Intermediates.
Though not all sectors will witness a slowdown, certain sectors will be more vulnerable, such as financials and banking services, real estate, industrials, capital goods and auto, among a few others.
Analysts are also predicting a slowdown in the BSE Sensex earnings in the FY09 in the range of about 5-10 per cent.
"We expect Sensex EPS to be Rs 1,001 for FY09. We have revised this slightly lower (by one per cent) over the past couple of months from Rs 1,012, but do believe that the risk for further downward revisions does exist," says Ajay Loganadan, Head Investment Advisory Group, HSBC Private Banking.
Foreign capitalConsidering these issues coupled with the slowdown in the earnings, market participants say that the Indian equity markets are relatively expensive as compared to other emerging markets. Also, this is cited as one of the reasons for the FIIs selling witnessed lately.
The depreciation of the rupee has lowered net returns (in dollar terms) for FIIs.
While sharing his view on the FII investments, Ajay Loganadan say, "FIIs have been net sellers of Indian equities to the tune of about $4.2 billion with about $1.2 billion of this selling coming in May.
Given the high levels of risk aversion and P/E contraction, we could expect flows to remain muted over the near term. Fund flow for the rest of the year will depend on global news flow and the perception of risk amongst foreign investors. Also, rising trade and fiscal deficits are not viewed very favourably by FIIs."
Global marketsBesides the FII flows the direction of the market will be determined by the global developments, which are not considered to be very favourable. "In our view, global markets are going to remain weak over the next 12 months.
US Housing data continues to get worse, record number of small businesses in the US are filing for bankruptcy (5,000 in April 2008 alone), debt of 174 large US companies is trading at distressed levels.
In these circumstances, it is tough to make a case for stability in the US financial space," says Madhusudan Rajagopalan, Director, Aranca India Operations. Besides the instability and slow down in the US, analysts also see more risk due to the sub prime crisis. So far, major banks and other financial institutions across the world have reported losses of approximately $380 billion. In a recent development, Lehman Brothers Holding, a top investment bank in the US is expected to raise approximately $4 billion to shore up its balance sheet after incurring losses due to the subprime crisis (S&Powngraded its ratings).
The rating agency also downgraded credit ratings of Merrill Lynch and Morgan Stanley, saying they may have to book more write-downs on devalued assets.
OutlookFor many, it is a bearish market due to the negative micro and macro factors that are affecting the markets, while for others it is the right time to invest and use the lower levels as an opportunity to invest for the long term. Considering that these issues remain, it also indicates that there are concerns for the market to rise from here in the near term.
A good monsoon, lower inflation rate along with the better global cues could be the positive triggers, which though seem some time away.
Monday, June 09, 2008
Oil Prices Raise Cost of Making Range of Goods
Surging oil prices are beginning to cut into the profits of a wide range of American businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.
Airlines, package shippers and car owners are no longer the only ones being squeezed by the ever-mounting price of oil, which shot up almost $11 a barrel on Friday alone, to $138.54, a record.
Companies that make hard goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers, or all three?
The Goodyear Tire and Rubber Company is trying to adapt. Its raw material of choice now is natural rubber rather than synthetic rubber, made from oil. To sustain profits, it is making more high-end tires for consumers willing to pay upwards of $100 to replace each tire on their cars.
These steps have not been enough, however, particularly now that the cost of natural rubber is also rising sharply, along with that of many other commodities. So Goodyear has raised the prices of its tires by 15 percent in just four months.
“Our strategy is to raise prices and improve the mix to offset the cost of raw materials,” said Keith Price, a Goodyear spokesman. “No one has predicted how long we can continue to do that.”
The sense that many companies may be hitting a wall is palpable. Corporate profits peaked last spring and have shrunk since then, Moody’s Economy.com reports, drawing on Commerce Department data.
The housing crisis and the weakening economy are big reasons, but oil prices are adding greatly to the pressure on profits as retailers fail to pass along higher prices to consumers. That helps to explain why expensive oil has not yet pushed up the inflation rate.
So far this year, the nation’s employers have been cutting jobs at an accelerating pace, particularly last month, when the unemployment rate jumped to 5.5 percent from 5 percent. But with the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, including job cuts and higher prices, may be in store, economists say, although there is still room to avoid such steps.
“Companies came into this period with extraordinarily high profit margins,” said Edward McKelvey, chief domestic economist at Goldman Sachs, “and some of the surge in raw material costs will be absorbed by lowering those profits.”
Still, the prevailing attitude that the economy could just keep absorbing higher oil prices is being tested — for the first time in nearly 30 years. Adjusted for inflation, a barrel of crude is now more expensive than it was in 1980, the previous peak.
“The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But now it plainly does. People are suddenly paying much more attention to their energy costs and trying to figure out how to manage them.”
Goodyear has kept its head above water in part by passing along some of the higher prices to dealers. The dealers, however, have not been able to pass along all of those increases to consumers and are absorbing the difference in lower profits.
Since last spring, the average profits of the nation’s corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.
Even companies that have been performing well in the economic downturn are sounding notes of caution. Take Costco, the discount retail chain, which offers a wide array of consumer goods, food, wine, furniture, appliances, beauty aids and much more.
Costco’s profit was up in the first quarter, but James D. Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.
“We just made a big purchase of Tumi luggage,” Mr. Sinegal said
Procter & Gamble finds itself in a similar predicament. For its fiscal year beginning next month, it expects to spend an additional $2 billion on oil-based raw materials and commodities. That is double last year’s increase, and it is carved from total revenue of just under $80 billion.
Price increases have helped to offset this cost. They have averaged nearly 5 percent for paper towels, bath tissues and diapers, all made with chemicals derived from oil, said Paul Fox, a company spokesman.
Natural oils have been substituted for ingredients made from petroleum; for example, palm oil now goes into a variety of laundry soaps. But like rubber, the cost of palm oil and other natural commodities is rising.
Trying to hold down raw material costs, Procter & Gamble has resorted to “compacting” a few laundry products, Mr. Fox said, so that the same amount of detergent fits into smaller and less costly containers made of plastic, which is derived from oil.
Still, the company’s operating profit edged down to 20.1 percent of revenue in the first quarter, from 21.9 percent in each of the two previous quarters. “That 20.1 percent was down, but it was an improvement on the advance guidance we had given for that quarter,” Mr. Fox said.
No business in America produces more of the oil-based ingredients that go into the nation’s products than the Dow Chemical Company, based in Midland, Mich. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin.
Indeed, paint, computer and television screens, mobile phones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.
Dow normally raises prices piecemeal. Last month, though, the surge in the cost of oil and natural gas, the company’s principal raw materials, produced a rare across-the-board price increase of as much as 20 percent.
“We have taken out head count, automated, been very diligent on cost control,” said Andrew Liveris, Dow’s chairman and chief executive, “but these surges in energy prices are just one surge too many.”
Dow’s sweeping price increases will probably have a domino effect, resulting in higher prices or, more likely, shrinking profits, analysts say. Constrained by the weak economy and fewer wage earners among their customers, the nation’s retailers have so far not been able to pass on to consumers much of the rising cost of products that depend on oil. The Consumer Price Index, minus food and energy, is barely rising.
“One of the surprises,” said Patrick Jackman, a senior economist in the consumer price division of the Bureau of Labor Statistics, “is that the oil price surges of the 1970s passed through fairly quickly into consumer prices, and this time that is not happening.”
Airlines, package shippers and car owners are no longer the only ones being squeezed by the ever-mounting price of oil, which shot up almost $11 a barrel on Friday alone, to $138.54, a record.
Companies that make hard goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers, or all three?
The Goodyear Tire and Rubber Company is trying to adapt. Its raw material of choice now is natural rubber rather than synthetic rubber, made from oil. To sustain profits, it is making more high-end tires for consumers willing to pay upwards of $100 to replace each tire on their cars.
These steps have not been enough, however, particularly now that the cost of natural rubber is also rising sharply, along with that of many other commodities. So Goodyear has raised the prices of its tires by 15 percent in just four months.
“Our strategy is to raise prices and improve the mix to offset the cost of raw materials,” said Keith Price, a Goodyear spokesman. “No one has predicted how long we can continue to do that.”
The sense that many companies may be hitting a wall is palpable. Corporate profits peaked last spring and have shrunk since then, Moody’s Economy.com reports, drawing on Commerce Department data.
The housing crisis and the weakening economy are big reasons, but oil prices are adding greatly to the pressure on profits as retailers fail to pass along higher prices to consumers. That helps to explain why expensive oil has not yet pushed up the inflation rate.
So far this year, the nation’s employers have been cutting jobs at an accelerating pace, particularly last month, when the unemployment rate jumped to 5.5 percent from 5 percent. But with the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, including job cuts and higher prices, may be in store, economists say, although there is still room to avoid such steps.
“Companies came into this period with extraordinarily high profit margins,” said Edward McKelvey, chief domestic economist at Goldman Sachs, “and some of the surge in raw material costs will be absorbed by lowering those profits.”
Still, the prevailing attitude that the economy could just keep absorbing higher oil prices is being tested — for the first time in nearly 30 years. Adjusted for inflation, a barrel of crude is now more expensive than it was in 1980, the previous peak.
“The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But now it plainly does. People are suddenly paying much more attention to their energy costs and trying to figure out how to manage them.”
Goodyear has kept its head above water in part by passing along some of the higher prices to dealers. The dealers, however, have not been able to pass along all of those increases to consumers and are absorbing the difference in lower profits.
Since last spring, the average profits of the nation’s corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.
Even companies that have been performing well in the economic downturn are sounding notes of caution. Take Costco, the discount retail chain, which offers a wide array of consumer goods, food, wine, furniture, appliances, beauty aids and much more.
Costco’s profit was up in the first quarter, but James D. Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.
“We just made a big purchase of Tumi luggage,” Mr. Sinegal said
Procter & Gamble finds itself in a similar predicament. For its fiscal year beginning next month, it expects to spend an additional $2 billion on oil-based raw materials and commodities. That is double last year’s increase, and it is carved from total revenue of just under $80 billion.
Price increases have helped to offset this cost. They have averaged nearly 5 percent for paper towels, bath tissues and diapers, all made with chemicals derived from oil, said Paul Fox, a company spokesman.
Natural oils have been substituted for ingredients made from petroleum; for example, palm oil now goes into a variety of laundry soaps. But like rubber, the cost of palm oil and other natural commodities is rising.
Trying to hold down raw material costs, Procter & Gamble has resorted to “compacting” a few laundry products, Mr. Fox said, so that the same amount of detergent fits into smaller and less costly containers made of plastic, which is derived from oil.
Still, the company’s operating profit edged down to 20.1 percent of revenue in the first quarter, from 21.9 percent in each of the two previous quarters. “That 20.1 percent was down, but it was an improvement on the advance guidance we had given for that quarter,” Mr. Fox said.
No business in America produces more of the oil-based ingredients that go into the nation’s products than the Dow Chemical Company, based in Midland, Mich. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin.
Indeed, paint, computer and television screens, mobile phones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.
Dow normally raises prices piecemeal. Last month, though, the surge in the cost of oil and natural gas, the company’s principal raw materials, produced a rare across-the-board price increase of as much as 20 percent.
“We have taken out head count, automated, been very diligent on cost control,” said Andrew Liveris, Dow’s chairman and chief executive, “but these surges in energy prices are just one surge too many.”
Dow’s sweeping price increases will probably have a domino effect, resulting in higher prices or, more likely, shrinking profits, analysts say. Constrained by the weak economy and fewer wage earners among their customers, the nation’s retailers have so far not been able to pass on to consumers much of the rising cost of products that depend on oil. The Consumer Price Index, minus food and energy, is barely rising.
“One of the surprises,” said Patrick Jackman, a senior economist in the consumer price division of the Bureau of Labor Statistics, “is that the oil price surges of the 1970s passed through fairly quickly into consumer prices, and this time that is not happening.”
Industrial Nations Vow to Cut Oil Use
The world’s leading economies and oil consumers are pledging greater investment in energy efficiency and green technologies to curtail petroleum use.
In a joint statement on Sunday, energy ministers from the Group of 8 countries, the United States, Japan, Russia, Germany, France, Britain, Italy and Canada, joined by China, India and South Korea, also urged oil producers to increase output, which has stalled at about 85 million barrels a day since 2005. They also called for cooperation between buyers and producers.
But with little prospect for a surge in production anytime soon, the focus of Sunday’s meeting was on what wealthy nations should do to rein in consumption, while reducing carbon emissions blamed for global warming.
While the nations did not pledge specific amounts of money, they said they would set goals in line with International Energy Agency recommendations for a vast expansion of investment in renewable energies and energy efficiency.
The G-8 countries said they would begin 20 demonstration projects by 2010.
In a joint statement on Sunday, energy ministers from the Group of 8 countries, the United States, Japan, Russia, Germany, France, Britain, Italy and Canada, joined by China, India and South Korea, also urged oil producers to increase output, which has stalled at about 85 million barrels a day since 2005. They also called for cooperation between buyers and producers.
But with little prospect for a surge in production anytime soon, the focus of Sunday’s meeting was on what wealthy nations should do to rein in consumption, while reducing carbon emissions blamed for global warming.
While the nations did not pledge specific amounts of money, they said they would set goals in line with International Energy Agency recommendations for a vast expansion of investment in renewable energies and energy efficiency.
The G-8 countries said they would begin 20 demonstration projects by 2010.
India Unable to Use Rupee Gains to Curb Inflation, Fitch Says
India's widening current-account deficit and slowing capital inflows from overseas have denied policy makers the option of letting the rupee gain to curb inflation, according to Fitch Ratings.
The local currency this year has pared more than half of its advance in 2007, when it rallied 12.3 percent, the most in more than three decades. Sales of local stocks by overseas funds and rising oil prices sparked the slump. India's annual inflation rate more than doubled to 8.24 percent in the week ended May 24 from a five-year low of 3.07 percent mid-October.
``Our sense is that when the inflation numbers had started to go up, the central bank had the option to allow the currency rise at their discretion,'' James McCormack, Fitch's head of Asia-Pacific sovereign ratings, said in Mumbai on June 6. ``That has now been taken away because the current-account position isn't strong and capital inflows aren't rising either.''
India's trade deficit widened to a record $9.9 billion in April while the shortfall in the current account, a broad measure of trade and investment flows, widened to $5.4 billion in the quarter through December from $4.7 billion in the previous quarter, according to the central bank.
Overseas money managers sold $4.8 billion more local shares than they bought this year, more than a fourth of their record net purchases in 2007, according to data provided by the Securities and Exchange Board of India.
The rupee closed last week at 42.66 per U.S. dollar.
Inflation may jump to a 13-year high of 9.5 percent after the government raised the retail prices of diesel, gasoline and cooking gas last week, according to analysts at Lehman Brothers Holdings Inc., Standard Chartered Plc and ICICI Securities Ltd. Crude oil prices have more than doubled in the past 12 months to a record $139.12 a barrel on the New York Mercantile Exchange.
``Exchange rate appreciation pressures persisted last year because of the flows,'' McCormack said. ``They don't have the option now. Over time there will now be pressure on the exchange rate to weaken. The rupee is going to remain on the same course for the rest of the year.''
The local currency this year has pared more than half of its advance in 2007, when it rallied 12.3 percent, the most in more than three decades. Sales of local stocks by overseas funds and rising oil prices sparked the slump. India's annual inflation rate more than doubled to 8.24 percent in the week ended May 24 from a five-year low of 3.07 percent mid-October.
``Our sense is that when the inflation numbers had started to go up, the central bank had the option to allow the currency rise at their discretion,'' James McCormack, Fitch's head of Asia-Pacific sovereign ratings, said in Mumbai on June 6. ``That has now been taken away because the current-account position isn't strong and capital inflows aren't rising either.''
India's trade deficit widened to a record $9.9 billion in April while the shortfall in the current account, a broad measure of trade and investment flows, widened to $5.4 billion in the quarter through December from $4.7 billion in the previous quarter, according to the central bank.
Overseas money managers sold $4.8 billion more local shares than they bought this year, more than a fourth of their record net purchases in 2007, according to data provided by the Securities and Exchange Board of India.
The rupee closed last week at 42.66 per U.S. dollar.
Inflation may jump to a 13-year high of 9.5 percent after the government raised the retail prices of diesel, gasoline and cooking gas last week, according to analysts at Lehman Brothers Holdings Inc., Standard Chartered Plc and ICICI Securities Ltd. Crude oil prices have more than doubled in the past 12 months to a record $139.12 a barrel on the New York Mercantile Exchange.
``Exchange rate appreciation pressures persisted last year because of the flows,'' McCormack said. ``They don't have the option now. Over time there will now be pressure on the exchange rate to weaken. The rupee is going to remain on the same course for the rest of the year.''
MARKET UPDATES
Asian stocks dropped, led by automakers and technology companies, on concern surging oil prices and slowing U.S. growth will derail earnings.
Toyota Motor Corp., Japan's largest automaker, and Samsung Electronics Co., Asia's biggest maker of chips, mobile phones and flat panels, fell after U.S. unemployment rose the most in 22 years. Korean Air Lines Co. plunged the most in three months after Goldman, Sachs & Co. cut its share-price forecast and crude jumped more than $10 a barrel on June 6. India's Sensitive Index tumbled 4.3 percent, the most since March.
``We're being attacked from all fronts,'' said Jason Lee, who helps oversee the equivalent of $2.1 billion as general manager of equities at Amanah Raya-JMF Asset Management in Kuala Lumpur. ``We're heading for tough times; expect to see more earnings revisions.''
The MSCI Asia Pacific Index lost 1.5 percent to 148.05 as of 2:40 p.m. in Tokyo, with about nine stocks retreating for each that climbed. All 10 industry groups and every Asian market dropped, apart from Hong Kong, China, Australia and the Philippines, which are closed today for holidays.
Japan's Nikkei 225 Stock Average declined 2 percent to 14,204.97, after ending last week at the highest since Jan. 9.
U.S. stocks tumbled on June 6, sparking the Dow Jones Industrial Average's worst sell-off in 15 months, after the Labor Department said the jobless rate grew to 5.5 percent in May from 5 percent in April, the biggest increase since 1986. Standard & Poor's 500 Index futures expiring in June climbed 0.2 percent.
Toyota, Sony
Toyota, which gets about half of its profit from North America, dropped 2.7 percent to 5,440 yen. Sony Corp., the world's second-largest maker of consumer electronics, fell 3.3 percent to 5,300 yen. Samsung lost 3 percent to 688,000 won.
A loss of jobs is one of the criteria used by the National Bureau of Economic Research to determine when recessions begin and end. The group, the official arbiter in the U.S., defines contractions as a ``significant'' decrease in activity over a sustained period of time.
MSCI's Asian index has dropped 6.1 percent this year amid signs of slowing expansion in the U.S. and $389 billion of writedowns and credit losses.
``If the U.S. goes, Asia and the rest of the world will also go,'' said Leslie Phang, who helps oversee about $260 billion as Singapore-based head of investment at Schroders Plc's private- clients unit. ``We've now shifted from the scenario of slowdown driven by the credit crunch to that of stagflation because of high oil prices.''
Hon Hai Precision Industry Co., which makes iPods for Apple Inc. and computers for Dell Inc., slumped 3.3 percent to NT$175. Nintendo Co., maker of the Wii game console, slipped 1.7 percent to 57,300 yen.
Oil's Rally
The unemployment report sent the dollar lower, triggering demand among investors for commodities. Crude oil for July delivery rose 8.4 percent on June 6 to $138.54 a barrel in New York, the biggest-ever gain in dollar terms and the largest percentage increase since mid-June 1996. Futures reached a record high of $139.12 during the session.
Record oil prices sent South Korea's consumer confidence lower to 92.2 in May from 100.4 in April, according to the National Statistical Office. That's the weakest in more than three years. Oil prices topping $130 a barrel may slow global economic growth, Japan's Trade Minister Akira Amari said yesterday.
Korean Air, South Korea's largest airline, dropped 5 percent to 51,300 won, set for its biggest drop since April 14. Goldman Sachs cut its share-price estimate by 22 percent to 45,800 won in a report on June 6, saying airline stocks will lag behind other equities because of soaring fuel costs and a decline in traffic.
Flights Cancelled
China Airlines, Taiwan's largest carrier, dropped 5.4 percent to NT$14.90 after spokesman Bruce Chen said the company will cancel 100 passenger flights and 50 cargo services a month, or about 10 percent of its capacity, as jet-fuel prices surge.
EVA Airways Corp. will cancel about 5 percent of its passenger services from Sept. 1 to Dec. 1, spokeswoman Katherine Ko said. The stock fell 4.7 percent to NT$16.30 in Taipei.
Bharat Petroleum Corp., India's second-biggest state refiner, slumped 10 percent to 269.85 rupees on concern that increased fuel prices won't be able to offset losses. The government raised fuel prices on June 4 and reduced taxes to narrow more than $50 billion of revenue losses at refiners.
Indian Oil Corp., the largest, lost 7.7 percent to 349 rupees.
Via Technologies Inc., Taiwan's largest designer of computer processors, gained 6.8 percent to NT$21.95, the biggest advance on MSCI's Asian index. Via said it will cooperate with Nvidia Corp., the world's second-largest maker of graphics-processors, to develop chips for small-sized desktop computers and mini- notebooks.
Toyota Motor Corp., Japan's largest automaker, and Samsung Electronics Co., Asia's biggest maker of chips, mobile phones and flat panels, fell after U.S. unemployment rose the most in 22 years. Korean Air Lines Co. plunged the most in three months after Goldman, Sachs & Co. cut its share-price forecast and crude jumped more than $10 a barrel on June 6. India's Sensitive Index tumbled 4.3 percent, the most since March.
``We're being attacked from all fronts,'' said Jason Lee, who helps oversee the equivalent of $2.1 billion as general manager of equities at Amanah Raya-JMF Asset Management in Kuala Lumpur. ``We're heading for tough times; expect to see more earnings revisions.''
The MSCI Asia Pacific Index lost 1.5 percent to 148.05 as of 2:40 p.m. in Tokyo, with about nine stocks retreating for each that climbed. All 10 industry groups and every Asian market dropped, apart from Hong Kong, China, Australia and the Philippines, which are closed today for holidays.
Japan's Nikkei 225 Stock Average declined 2 percent to 14,204.97, after ending last week at the highest since Jan. 9.
U.S. stocks tumbled on June 6, sparking the Dow Jones Industrial Average's worst sell-off in 15 months, after the Labor Department said the jobless rate grew to 5.5 percent in May from 5 percent in April, the biggest increase since 1986. Standard & Poor's 500 Index futures expiring in June climbed 0.2 percent.
Toyota, Sony
Toyota, which gets about half of its profit from North America, dropped 2.7 percent to 5,440 yen. Sony Corp., the world's second-largest maker of consumer electronics, fell 3.3 percent to 5,300 yen. Samsung lost 3 percent to 688,000 won.
A loss of jobs is one of the criteria used by the National Bureau of Economic Research to determine when recessions begin and end. The group, the official arbiter in the U.S., defines contractions as a ``significant'' decrease in activity over a sustained period of time.
MSCI's Asian index has dropped 6.1 percent this year amid signs of slowing expansion in the U.S. and $389 billion of writedowns and credit losses.
``If the U.S. goes, Asia and the rest of the world will also go,'' said Leslie Phang, who helps oversee about $260 billion as Singapore-based head of investment at Schroders Plc's private- clients unit. ``We've now shifted from the scenario of slowdown driven by the credit crunch to that of stagflation because of high oil prices.''
Hon Hai Precision Industry Co., which makes iPods for Apple Inc. and computers for Dell Inc., slumped 3.3 percent to NT$175. Nintendo Co., maker of the Wii game console, slipped 1.7 percent to 57,300 yen.
Oil's Rally
The unemployment report sent the dollar lower, triggering demand among investors for commodities. Crude oil for July delivery rose 8.4 percent on June 6 to $138.54 a barrel in New York, the biggest-ever gain in dollar terms and the largest percentage increase since mid-June 1996. Futures reached a record high of $139.12 during the session.
Record oil prices sent South Korea's consumer confidence lower to 92.2 in May from 100.4 in April, according to the National Statistical Office. That's the weakest in more than three years. Oil prices topping $130 a barrel may slow global economic growth, Japan's Trade Minister Akira Amari said yesterday.
Korean Air, South Korea's largest airline, dropped 5 percent to 51,300 won, set for its biggest drop since April 14. Goldman Sachs cut its share-price estimate by 22 percent to 45,800 won in a report on June 6, saying airline stocks will lag behind other equities because of soaring fuel costs and a decline in traffic.
Flights Cancelled
China Airlines, Taiwan's largest carrier, dropped 5.4 percent to NT$14.90 after spokesman Bruce Chen said the company will cancel 100 passenger flights and 50 cargo services a month, or about 10 percent of its capacity, as jet-fuel prices surge.
EVA Airways Corp. will cancel about 5 percent of its passenger services from Sept. 1 to Dec. 1, spokeswoman Katherine Ko said. The stock fell 4.7 percent to NT$16.30 in Taipei.
Bharat Petroleum Corp., India's second-biggest state refiner, slumped 10 percent to 269.85 rupees on concern that increased fuel prices won't be able to offset losses. The government raised fuel prices on June 4 and reduced taxes to narrow more than $50 billion of revenue losses at refiners.
Indian Oil Corp., the largest, lost 7.7 percent to 349 rupees.
Via Technologies Inc., Taiwan's largest designer of computer processors, gained 6.8 percent to NT$21.95, the biggest advance on MSCI's Asian index. Via said it will cooperate with Nvidia Corp., the world's second-largest maker of graphics-processors, to develop chips for small-sized desktop computers and mini- notebooks.
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