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Weekly Wrap-UpJanuary 31 - February 4, 2000 |
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Weekly Wrap-UpJanuary 31 - February 4, 2000 |
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The North American bond market rallied again this week in the face of interest rate increases by central banks. The technical short squeeze in the US long bond was exacerbated by large institutional accounts selling 10 year bonds to buy 30 year bonds. US Treasury Undersecretary Gary Gensler indicated that the Treasury would cut the number of long bond auctions per year in half and push to make the 10 year bond the US benchmark. Also disclosed by the US Treasury was the desire to retire high coupon off the run long dated Treasuries in an effort to reduce the US maturity schedule.
Central banks were hard at work this week raising interest rates in an effort to reduce the risk of the economic expansion over heating. The Australian Reserve Bank raised short-term rates 50 basis points to 5.50%. The Federal Reserve Board in the US raises short-term rates 25 basis points to 5.75%. Not to be outdone, the Bank of Canada raised interest rates 25 basis points as well. The rate increases come at a time when the economic data released by government agencies continue to point to a red hot economy, with signs of resource constraints, particularly in the labour force.
While Asia appears to be growing out of its recession, the Japanese economy continues to falter. Economic data indicate that the Japanese consumer is not present, and the only sustained growth in the economy has come from the governments' pocket. Housing starts fell 0.8% year-over-year; construction orders fell 13.1% year-over-year; third quarter GDP fell 3.8%, and the unemployment rate rose to 4.8%. All this points to Japan continuing to lag the rest of the Asian recovery, and for the Ministry of Finance to hold interest rates as low as possible.
Gold had a particularly shiny week, as it rallied 9.68%, or $US 27.40, to close at $US 310.40. The driving force behind the rise in price was the announcement by Placer Dome that the hedging program that it initiated, which involves short selling gold and borrowing bullion to fill the sale, would come to an end. This would continue to be supportive of gold if Barrick, and the Australian producers do the same. It will take a price of $US 325/ounce to get some of the smaller exploration companies up and running again.
Economic data released in both Canada and the US supported the interest rate moves by the two central banks. In Canada, GDP for November rose 0.6% month-over-month, equivalent to a 4.3% increase year-over-year; motor vehicle sales for January rose 8.2% year-over-year; unemployment rate was 6.8%, with 44,300 new full-time jobs added. In the US, personal income rose 0.3% monthly for an increase of 5.9% on an annualized basis; personal spending rose 0.8% monthly for a yearly increase of 5.9%; savings rate fell to 1.5%, from 2%, for a year-over-year rate of 2.4% (the lowest rate ever posted in the US); NAPM remained strong at 56.3, while prices paid soared to a 5 year high of 72.6 from 68.3; non-farm payrolls rose 387,000, with unemployment rate falling to a 30 year low of 4.0%. Hot, hot, hot.
The bond market rallied over the course of the week. Price movement was driven by technical and supply related factors. In the US, Treasury Undersecretary Gary Gensler announced the reduction of the size and number of long bond auctions to be conducted by the Treasury. The announcement also indicated that the US Treasury would be on a program to buy back long dated off-the-run bonds in an effort to reduce the term-to-maturity of the US government debt. This put a bid in the long end of the yield curve. As well, a technical short squeeze in the US and Canadian long bond market added to the move. Over the week, the Government of Canada 30 year long bond shed 13 basis points to close at 6.15%, after printing a low closing yield of 6.07%. In the US, the Treasury 30 year bond rallied 20 basis points to close at 6.23%, after closing at 6.17% mid-week. This is a very different market than the one which existed two weeks ago when US long bond yields were at 6.74%. (A basis point is 1/100th of a percent.)
The North American equity markets continue to appear on fire, as new record high closes were set this week. The concern is that the rally is not broad based, as few stocks are participating in the move up. Techs and telecoms continue to dominate the performance of the major exchanges as investors favour "clicks" over "bricks". The Nasdaq is proof positive of this, rising over 9% on the week.
The usual suspects were present in the rally this week. Intel, Microsoft, Cisco, Qualcomm, in the US. JDS Uniphase, BCE, Nortel, Newbridge, Research in Motion, in Canada. The rest of the market continues to tread water, as indicated by the advance/decline line. This is an indicator which measures the market breadth of any move. This week more stocks set new 52 week lows than set new 52 week highs. Fewer and fewer stocks are doing more and more of the work.
In Canada, the TSE put in a stellar appearance on the week. The big techs lead the TSE higher, as the exchange added 818.80 points, or 9.76%, to close at 9209.20. The DJIA added a mere 225.43 points, or 2.10%, to close at 10,963.80. The S&P500 also had an average week in comparison, rising 64.21 points, or 4.72%, to close at 1424.37. The Nasdaq, like the TSE, posted a significant gain on the week rising 357.07 points, or 9.19%, to close at 4244.77.
The volatility in the bond markets is growing, and the tech driven rally continues to hold sway in the world of equities. Next week brings little significant economic data and lots of bond supply. The Government of Canada will auction $CDA 2.8 billion 5 years and the UST will auction $US 12 billion 3 year notes, $US 10 billion 10 year notes and $US 10 billion 30 year notes. Good trading.
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