By Anne D. Picker, International Economist,Econoday
Monday, July 15, 2002

World equities continued to spin downward as awful corporate news seems to continue unabated. Good news - and there was some on the economic front - didn't have a chance against the latest corporate malfeasance. Sell was the byword of the week. With the exception of the South Korean Kospi, all indexes covered here plummeted and some to multiyear lows. The dichotomy between the real economy and equities continues as economic indicators continue to improve while the markets continue to reel, not trusting anyone or anything. Investors ignored President Bush's proposals for corporate reform as too little, too late, and the slide in equities even accelerated after his speech. Losses on indexes ranged from 0.6 percent for the Australian all ordinaries to 9.1 percent for the Paris CAC.

According to the Japanese government's monthly economic report, the nation's economy is in the first stages of a recovery. The biggest quarterly exports rise in 21 years helped spur four months of rising factory production, which in turn is expected to spread throughout the economy. But consumer spending remains stagnant and unemployment is nearly record high. The pick up in exports and factory production haven't yet translated into new jobs, as companies, which paid out billions last year in severance, are awaiting clear evidence of recovery before adding to payrolls. Also a negative for the economy is the yen's precipitous rise in the past 3 1/2 months, which threatens to snuff out the recovery by eroding exporters' earnings.

Co-hosting (with South Korea) soccer's World Cup finals in June failed to give a boost to Japan's economy. A government survey of taxi drivers, noodle shop owners and other people considered to be working on the frontline of the economy found they were worse off last month than three months earlier. Television sales rose 38 percent in May from a year ago, meaning people stayed home to watch the tournament rather than go to a movie or a restaurant.

S&P announced that they were removing seven foreign corporations from their U.S. S&P 500 index. They included five Canadian and two European companies. When an index is restructured like this, investors who track the index with their own investments sell the companies that are being eliminated and buy those that are being added. The seven stocks being eliminated from the index plummeted on expectations that funds around the world that track the S&P 500 would sell them, creating a huge over supply and depressing prices. Share prices of the seven U.S. additions rose as investors anticipated a surge in demand from passive funds. The energy sector will experience the largest decline in its weighting influence; financials and industrials will be the biggest beneficiaries. The changes will take effect after the close on July 19. S&P 500 rules prevent non-U.S. companies from joining the index, but the seven being ejected were part of the index before the all-American rule applied. Unilever, for example, had been a member of the index for 40 years.

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