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Weekly Wrap-UpJanuary 10-14, 2000 |
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Weekly Wrap-UpJanuary 10-14, 2000 |
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The North American bond market continued to lose ground again this week. The bear market in bonds continues, as investors await the Federal Reserve Boards meeting in early February in order to gauge the extent to which interest rates will rise. Any move towards higher rates made by the Fed in the US will be met with a similar increase in short term rates in Canada. The holiday shortened week in the US did not add to the liquidity of the markets, as many traders packed up early Friday for an extended long weekend.
Many Federal Reserve Governors and District Presidents have made headlines over the past week, as a parade of Fed officials prepares the markets for the upcoming Federal Reserve Board meeting February 1-2. The remarks made by the various Fed officials all point to higher rates in the US. The inflation hawkish tone of Reserve Board members' comments lean heavily on the need to remain vigilant against the threat of inflationary pressures. The big concern for the Fed remains the tight labour markets in the US, along with the anecdotal evidence of accelerating wage settlement pressure. In a speech on Thursday evening, Federal Reserve Board Chairman Alan Greenspan indicated that the Fed would take a gradualist approach to interest rate changes. This took some of the fear out of the market.
On the inflation fighting front, the Bank of England raised its short term interest rates this week. The new short-term target for interest rates is 5.75%, a 25 basis point increase. Signs of accelerating inflation have been present in the UK economy, and the rise in interest rates was widely anticipated by the markets.
Last week Phoenix Hedge Fund in Canada announced that it had lost $CDA 7.4 million in unauthorized trading. After a closer look at it's books, the company has indicated that the losses are closer to the $CDA 180 million level. Needless to say, the regulatory authorities are very interested in this developing situation.
Economic data released this week continues to indicate an North American economy growing at a strong rate. Inflationary pressures remain tame in some measures, however, the key data source for Fed Chairman Greenspan employment and employment costs were not among the data series released. In the US, retail sales rose 1.2% in December - a 15 year high - with the data for November revised up 0.2% to 1.1%; producer price index rose 0.3%, with core +0.1%; consumer price index +0.2% with core +0.1%, the year-over-year basis CPI rose 2.7%, with the core rate up 1.9% - the lowest rate since 1965; industrial production rose 0.4%; capacity utilization rose 0.1 to 81.3. In Canada housing starts rose 0.3% in December.
US Treasury Secretary Lawrence Summers announced this week that the Treasury would participate in a buy back of Treasury notes and bonds. The $US 30 billion program is designed to retire high coupon off-the-run long maturity bonds in an effort to manage the Treasury's maturity ladder and interest costs. The program, the first of its kind since 1972, will help the Treasury manage its average term to maturity. The current average term to maturity is 5.75 years, but by 2004 it will grow to 8 years. This is not the term structure the Treasury desires, and as a result it has implemented the debt retirement program.
The bond market in Canada had to digest the first corporate deal of the year with a $CDA 1 billion transaction by Genesis Trust. The deal was well received by the buyers of high grade issues. The Government of Canada 30 year long bond finished the week weak at a yield of 6.45%, up 4 basis points. In the US, agencies and corporates combined to issue $US 17 billion, while the US Treasury added $US 6 billion inflation linked 10 year bonds to new supply. The market was hurt by continued fears of Fed action in a bond bear market which began back in November of 1998. The US Treasury 30 year long bond broke down through technical levels to close sloppy at a 6.69% yield, an increase of 15 basis points. (A basis point ids 1/100th of a percent.)
The North American equity markets seesawed all week, as inflation data, combined with 'Fed speak' kept the roller coaster ride alive. Merger and acquisition news had the Street a buzz with speculation of other potential take over targets. The $US 160 billion AOL take over of Time-Warner certainly grabbed the headlines.
The AOL/Time-Warner $US 160 billion stock deal is designed to provide AOL with a capability it does not currently possess, providing its current and future subscribers with high speed access. AOL's current 20 million subscribers can only access the internet through phone line connections. The Time/Warner deal provides high speed cable access to subscribers through Time/Warner's cable assets. The deal may also set up the potential for content on the internet to become a pay for use affair, rather than free information.
This week the TSE gets the goat horns. The Toronto exchange lost 71.96 points, or 0.85%, to close at 8357.46. The DJIA added 200.72 points, or 1.74%, to close at a record high 11,722.98. The Dow posted three record high closes over the week. The S&P 500 kept pace, adding 23.68 points, or 1.64%, to close up at 1463.15. The Nasdaq won the race this week with a gain of 181.65 points, or 4.68%, to close at 4064.27. The technology sector still looks vulnerable to further correction as investors are becoming impatient with the dot.coms ability to generate enough revenues to be profitable.
Next week brings the Martin Luther King Jr. Day holiday shortened trading session, as US markets will be closed on Monday. As well, look for the equity markets to react to earnings reports this upcoming week, as over 100 large reporting companies will issue earnings statements. Those who exceed analyst expectations will be rewarded. Those who just meet, or fail to meet, analyst expectations will be punished. Good trading.
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