Markets take fright as blue-chip Microsoft issues profit warning

The profits warning from Microsoft, the world's biggest company and a major component of both the Dow Jones and Nasdaq indices, drove stock markets around the world sharply lower yesterday.

After the markets closed on Thursday night, Microsoft warned that a global slowdown and lower corporate spending would hit its revenues and profits and that market expectations would not be met. Microsoft said it would fall short of analysts' consensus revenue and earnings projections by about 5 per cent. The only other time Microsoft said it would not meet forecasts was its March 1989 quarter. And even then, Microsoft beat Wall Street's initial targets.

Microsoft joins a growing pile of blue-chip stocks, including Intel, Eastman Kodak, General Motors and Chase Manhattan that are painting dismal growth pictures as the US economy slows from its breakneck pace.

Oracle, the world's second biggest software maker, offered a ray of hope to a market reeling from profit warnings after its profits beat expectations, helped by strong sales of business management software. This, however, was not enough to prevent a broad-based sell-off of both technology and "old economy" stocks.

Fears that years of economic growth may be heading towards a hard landing have sent investors scurrying for cover, particularly into the customary safe haven of US treasury bonds.

Predictably, given the heavy losses suffered by blue-chips like Microsoft, Intel and HewlettPackard, technology took the brunt of the New York selling pressure. From the opening bell, the Nasdaq Composite Index fell heavily and at the close was down 74.9, on 2,654.42. Microsoft and Intel also making up a large component of the Dow Jones, the blue-chip index was also sharply lower and closed down 239.27 on 10,435.72.

Microsoft's first profit warning in more than a decade sent European shares tumbling, capping a miserable week that left investors looking to next Tuesday's US Federal Reserve meeting for relief. The markets will be looking to see if the Fed will cut US interest rates to boost the economy before weakness turns into recession. The Stoxx European tech sector index slumped 4 per cent, leaving it down more than 7 per cent for the week and year. Europe's biggest technology company Nokia fell 5.4 per cent, German business software company SAP was down 7 per cent, and Britain's Psion slid 8 per cent.

"Obviously Nasdaq and the Dow are not good for the market's psychology, but also we have no buyers in this market. There's no real interest so when people want to get out, there's no resistance," said BNP trader Mr Christian Denk in Frankfurt.

Oils and banks also remained weaker on Friday, the former still suffering from retreating crude prices, and the latter from worries about bad loans and lower profits in the US. --(Additional reporting by Reuters)