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Weekly Wrap-UpJanuary 3-7, 2000 |
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Weekly Wrap-UpJanuary 3-7, 2000 |
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The North American fixed income markets started the new year on a volatile note. The concern over potential interest rate increases, combined with the release of employment data in both Canada and the US, prevented investors from getting excited about bonds.
Taking some of the uncertainty out of the market this week, was US President Clinton's announcement that Federal Reserve Board Chairman Alan Greenspan would be nominated for a fourth term as head of the US Federal Reserve Board. This is good news for the markets, due to the fact that the prudent management of US monetary policy stewarded by Mr. Greenspan will continue, provided the US Senate approves the nomination. There is little reason to believe that the Senate would choose not to approve the appointment. After all, Mr. Greenspan has presided over the Federal Reserve Board for the longest peace time economic expansion in US history. Why rain on the parade?
The Canadian market has experienced a 'mini-LTCM'. Canadian hedge fund Phoenix declared its intention to proceed with an orderly liquidation this week after discovering apparent inappropriate trading by one of its bond traders lead to a $CDA 7.4 million loss. The company and regulators are investigating the causes of the loss in an effort to discover where fault lies.
Due to the increasing interest rates evidenced in the bond market this week, and the longer term trend towards increasing rates, the major banks in Canada raised interest rates on mortgage loans. Long-term mortgages increased by 30 basis points to approximately 7.65%.
On the economic front, increased interest rates in the US has begun to dampen the US housing market as new home sales decreased 7% in November on a month-over-month basis; US non-farm payrolls added 315,000 new jobs; the unemployment rate remained at 4.1%; average hourly earnings rose 6 cents. In Canada the unemployment rate was 6.9%; 43,000 new jobs were created. The unemployment rates remained unchanged due to the number of people who continue to join the labour force.
In Canada the 30 year long bond closed at 6.41%, after a rough ride which saw yields rise to 6.49% mid-week. In the US, the Treasury 30 year long bond added to its recent losses, closing at a yield of 6.54%, after testing its recent high yield of 6.63% earlier in the week. Many dealers complained that the markets remain relatively illiquid, even with the holiday season and Y2K behind us. Several institutional accounts indicated that they were not going to participate in the markets until they were certain that the full trading and security settlement cycle were unaffected by the Y2K bug. Look for more liquidity to return to the bond markets next week.
The North American equity markets went on a volatile roller coaster ride in the first week of trading this year. Investors anxious to lock in profits from last years big winners, particularly the technology sector, sold to start the year off. This strategy allowed them to book profits, but not need to recognize the capital gains in the 1999 tax year.
Companies such as Nortel, BCE, Dell, and a lot of the dotcom stocks saw their market values eroded by investor selling. As the technology sector lost ground, the Nasdaq was down over 10% in the first few trading days of the year. However, the strength of the employment reports breathed life back into the stock markets, as investors refocused on the strength of the economy, and the potential for strong fourth quarter earnings.
One loser this week was Lucent Technology, which indicated fourth quarter earnings would be less than anticipated, lost 29% of its market capitalization at one point this week. The loss at Lucent ended up as a win at Nortel.
Nortel Networks recovered from being down over 15% on the week on the news of Lucent's profit warnings. Analysts believe that the losses at Lucent will translate into orders at Nortel. As well, Nortel announced the purchase of Promatory Communications for $US 780 million in stock. Promatory has designed technology which will allow private homes and businesses to have up to 12 phone or high speed internet lines on one traditional copper wire line.
On the acquisition tail is Chapters Online, who announced this week the purchase of GardenCrazy.com. This will move Chapters Online into more niche markets where it believes it can benefit from customer loyalty and increased revenues. The company has announced that it will look for more companies to purchase as opportunities arise. Analysts believe that the deal will eventually add to the cashflows of Chapters, but will mean a longer time horizon to profitability.
By the weeks end the TSE was up 0.2%, the Nasdaq had recovered to down 2%, the S&P500 was down 1.9%, while the DJIA was up 0.2% and closed the week at a record high.
Next week brings more accounts back to the market, which should mean an increase in market liquidity. Look for more profit taking in the technology sector as investors look for undervalued securities in the cyclical sector which can benefit from the economic resurgence of Europe and Asia. Interest rate sensitive stocks may languish until the Federal Reserve Board and the Bank of Canada make their intentions clear in early February. Good trading.
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