A relentless procession of grim corporate profits warnings, led by two major Canadian tech companies and worries about Microsoft, sent stocks on Wall Street spiralling downwards in early trading yesterday. But markets made an equally brisk recovery when bleak factory data showed that 23 per cent of US industrial capacity is lying idle, figures which, along with a tame inflation report, boosted the odds of another imminent interest rate cut.
The US Federal Reserve has cut rates by 50 basis points five times in as many months this year to prevent the US economy sliding into recession. Analysts had been predicting a 25-point cut at the Fed's June meeting in 10 days, but the prospects of a further half percentage point reduction are now much higher.
Shares in Toronto-based Nortel Networks tumbled 16 per cent in early trading after it announced an expected second quarter loss of $19.2 billion (€22.3 billion) brought on by a severe slowdown in spending on telecommunications equipment. The world leader in Internet and communications said it was cutting 10,000 jobs and eliminating its stock dividend.
The expected loss includes a deficit from operations and writedowns related to the diminished value of its investment in once high-flying technology businesses.
Ottawa-based JDS Uniphase, the world's largest supplier of fiber-optic components, said it had been hit by the telecoms spending slump and expected to post a loss on lower than expected revenues in the last quarter. JDS cut its sales forecast to $600 million for the quarter ending June 30th from its previous estimate of $700 million. Shares in JDS sank to a new 52week low.
Shares in Microsoft also declined on speculation by traders that the world's largest software company was set to issue a profit warning, though the Seattle-based firm refused to comment.
Hopes of a quick rebound for the US economy were dampened by a dismal report on industrial production. The Federal Reserve said production in factories, mines and utilities contracted for an eighth straight month, falling a worse-than-expected 0.8 per cent in May. Capacity use fell to 77.4 percent, its lowest since 1983.
"All the economic statistics and certainly the corporate announcements suggest the Fed is anything but finished. The Fed is going to have a lot more to do in the next six months," said Mr Richard Gilhooly, fixed-income market strategist at BNP Paribas.
The US government's May consumer price index, the most closely watched inflation gauge, rose 0.4 per cent in May following a 0.3 per cent gain in April, sufficiently low not to raise alarms at the Fed on inflation. US consumer confidence fell in June. The University of Michigan's consumer sentiment index slipped to 91.6 in June from 92.0 in May.
A lingering beef slump in Europe has hit McDonald's, which warned yesterday that earnings in the current quarter would be lower than expected. Two months ago, McDonald's said it was over the worst of the slump due to mad-cow disease and foot-and-mouth. The restaurant company still plans to open 1,500 new restaurants this year, anticipating "significant improvement" in the second half.
