Nikkei drops on mixed earnings; investors cautious ahead of Fed, ECB

Tue Jul 31, 2012 10:01pm EDT

* Sumitomo Heavy skids, slashes profit outlook on weak China
demand
    * Komatsu plummets after cuts profit outlook
    * Honda falls after undershoots expectations
    * But Panasonic, Softbank gain

    TOKYO, Aug 1 (Reuters) - Japan's Nikkei share average
dropped in early trade on Wednesday on weak earnings from
manufacturers such as Komatsu Ltd, with most investors
remaining cautious ahead of the outcomes of key central bank
meetings.
    Shipbuilder Sumitomo Heavy Industries Ltd lost 16.7
percent after cutting its profit outlook by 29 percent due to
weakening demand in China - a factor that has hurt profit
forecasts at a raft of companies.
    The Nikkei dropped 1.2 percent to 8,589.14, falling back
below its 14-day average after four straight days of gains took
it above that level on Wednesday, helped by investors trying to
improve their portfolios at the end of the month.  
    Earnings-inspired gains for a handful of companies including
Panasonic Corp, which shot up 5.9 percent after
striking its first quarterly profit since the October-December
quarter of 2010, were not enough to counter losses prompted by
disappointing forecasts at other firms.
    "Today is very much a day for cherry-picking stocks based on
earnings," said Ryota Sakagami, chief strategist of equity
research at SMBC Nikko. 
    "Everyone is waiting for the bigger macro events so it's not
time for purchasing the market as a whole." 
    Market players have been speculating on whether the U.S.
Federal Reserve will introduce new easing measures after a
two-day policy meeting on Wednesday, while the European Central
Bank will meet on Thursday following ECB president Mario
Draghi's comment last week that the bank would do "whatever it
takes" to save the euro.
    "There is very little chance that the Fed will bring in more
quantitative easing just yet but (Fed Chairman Ben) Bernanke
might give a sign whether they will do it at all in the future,"
Sakagami said. 
    "We're far more likely to see the ECB do something big, like
starting to buy Spanish bonds, simply because Draghi wouldn't
say something like that without following it up." 
    While weakening demand in Europe due to the region's fiscal
woes has cast a shadow over Japan's earning season, a slowdown
in China shifted into the spotlight on Wednesday morning as its
official Purchasing Manager's Index (PMI) came in at 50.1, below
expectations and down from 50.2 in June. 
    "Komatsu and other China-dependent firms are the ones to
watch today," said Masayuki Doshida, senior market analyst at
Rakuten Securities. 
     Komatsu Ltd, a construction machinery maker
dependent on China for much of its revenue, skidded 9.3 percent
to a 9-1/2 month low after cutting its annual operating profit
outlook by 16.8 percent and posting an 18.5 percent drop in
quarterly operating profit in April-June compared to the
previous year. 
    "China's central bank cut rates last month but it's not
helping; the Shanghai Composite index is still falling
and shows no sign of stopping," Doshida added.
    The Shanghai Composite lost 5.5 percent in July after losing
6.2 percent in June and has stooped to 40-month lows in recent
sessions. The Nikkei, by comparison, lost 3.5 percent in July.
 
    The broader Topix index dropped 1.2 percent to
727.38 yen.
    
    HONDA HURT
    Honda Motor Co Ltd shed 5.8 percent after the
automaker's operating profit for April-June came in below market
expectations as a strong yen eroded some of the gains from its
sales recovery in North America, its biggest and most profitable
market. 
    Panasonic Corp fared better, climbing 5.5 percent to a near
three-week high after the electronics maker posted a near
seven-fold increase in quarterly operating profit and set its
sights on further business restructuring to revive the company.
 
    Softbank Corp rose 4.2 percent after the mobile
phone operator said on Tuesday it would begin paying an interim
dividend of 20 yen, bringing the annual dividend to 40 yen. The
company posted a 9 percent increase in quarterly operating
profit for April-June. 
    Elsewhere, Olympus shed 7.4 percent after shareholder Terumo
Corp said on Tuesday it had filed a lawsuit against the
camera and endoscope maker, seeking damages for lost shareholder
value due to its accounting scandal last year. Terumo proposed a
50 billion yen investment in Olympus last week, an offer that
Olympus then said it was considering.
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