 |
Weekly Wrap-UpJanuary 17-21, 2000 |
 |
|
Weekly Wrap-UpJanuary 17-21, 2000 |
|
The North American bond markets spent the week trading in a technical manner ahead of the Federal Reserve Board's two day meeting at the beginning of February. It is clear that the Fed will raise interest rates, the question is now how many times and by how much? The Martin Luther King Jr. holiday shortened the trading session in the US and thinned out the volume in Canada. After testing new high yields, a technical short squeeze occurred pushing yields close to unchanged at the long end of the yield curve. The yield curve in both Canada and the United States is inverted in the 10 year to 30 year term.
On the international front it should be noted this week that the Reserve Bank of New Zealand raised short-term interest rates 25 basis points. The overnight rate now stands at 5.25%. The gradualist approach taken by the Reserve Bank foreshadows the upcoming interest rate increases expected out of the Fed and the Bank of Canada.
The meeting of G-7 countries produced little other than a pat on the back for Canada, the UK, and the US for their strong economies and diligence towards stable monetary conditions. As well, there was continued talk of a strong $US versus the Yen. This is pretty standard fare when this group gets together. Same old, same old.
Economic data released in both Canada and the US indicates that the economies of both countries continue to grow at a strong pace. In the US, housing starts were up 7.1% year-over-year in December due to warm weather. This was the best year for housing in the US since 1986. The US trade deficit came in at a record $US 26.5 billion in November, after the October was revised higher to $US 25.6 billion. The ballooning trade deficit continues to indicate that the US consumer has disposable income with which to fuel the economic fire. In Canada, existing home sales rose 7% on an annualized basis. Canada's trade surplus rose to $CDA 3.1 billion, with exports rising 1.4% and imports declining 0.2%. The increase in the surplus was directly the result of trade with the US. Canadian CPI rose 2.6% year-over-year in 1999, while the core rate of inflation (less food & energy) rose 1.6%. With unemployment dropping quickly in Canada and headline inflation approaching the top end of the Bank of Canada's targeted 1-3%, look for the Bank of Canada to match any move by the Federal Reserve Board.
In Canada, the bond market saw supply in corporate bonds, particularly in the 10 year sector. All the deals were well received as the investor community is starved for yield. After a choppy week, the Government of Canada 30 year long bond finished 1 basis point lower in yield, in technical trading, at 6.44%. The US Treasury 30 year bond was quite volatile over the holiday shortened trading session finishing at 6.70%, 1 basis point higher. The Canadian and US markets continue to test support levels as they trade at 28 month high yields. (A basis point is 1/100th of a percent.)
The North American equity markets continued to chase technology stocks this week. The bricks and mortar stocks of the Dow are dull in comparison to the momentum polished technology stocks of the Nasdaq. The two exchanges diverged significantly this week. The Dow down 4%, the Nasdaq up 4.2%. The TSE was torn between the two sectors with the technologies taking the market higher on the week. Don't stand in front of a fast moving train.
Techs continue to lead the market with shares of Nortel, JDS Uniphase, Research in Motion, Qualcomm and Microsoft all posting strong gains on the week, while old standards such as Alcoa, Proctor and Gamble, and General Electric all underperformed. The industrial and consumer groups continue to lose to the techs and telecoms. Nortel Networks broke through the $200 billion capitalization level this week. This occurred only 4 months after it sliced through the $100 billion market capitalization mark. Things that make you go Hmmmmm.
Statements out of OPEC indicate that the quotas established in March of 1999 are likely to remain in place for the next 3 months. There is still concern among OPEC ministers that global inventories are to high. This caused oil to reach its highest price since the Gulf War, and oil & gas stocks to rally. A cold snap in the north-east US also helped to drive up the price of oil, as demand for heating continues to rise.
In Toronto, the TSE finished the week at 8634.91, up 3.32%, or 277.45 points. Mid-week the TSE posted two record high closes, before finishing off its highs on Nortel profit taking Friday. The DJIA on the other hand was off 4.02%, or 471.27 points, to close the week at 11,251.71. The S&P500 also languished dropping 1.62%, to 1441.36. The Nasdaq surged ahead 4.21%, or 171.13 points, to close the week at a record high 4235.40. This was the third record high close of the week for the Nasdaq. The technology and telecom momentum continues to drive valuations to unheard of levels.
Next week housing data, durable goods orders, fourth quarter GDP and the employment cost index are all released. The last item on the list has the potential to be the most significant for the markets. Look for more volatility in fixed income securities, and a battle of bricks and mortar versus techs and telecoms in the equity markets. Good trading.
Weekly
Wrap-Up Archives
The
Markets Page
The
Financial Pipeline Homepage