Weekly Wrap-Up February 7-11, 2000

The North American bond market had to digest significant government supply this week. In Canada, the Bank of Canada issued $CDA 2.8 billion 5 year bonds. In the US supply was large and not well received as $US 32 billion was issued by the Treasury. Adding to the US bond markets woes, were unsupportive comments made by US Treasury Secretary Summers. The equity markets were mixed this week as the DJIA was hit hard, while the Nasdaq added to its gains for the year. New record high closes were set mid-week by both the Nasdaq and the TSE. The tech stocks continue to lead the market, with Toronto being referred to as 'Nasdaq North'.

The North American bond market had to digest significant government supply this week. In Canada, the Bank of Canada issued $CDA 2.8 billion 5 year bonds. In the US supply was large and not well received as $US 32 billion was issued by the Treasury. Adding to the US bond markets woes, were unsupportive comments made by US Treasury Secretary Summers.

A week ago, the US Treasury Undersecretary indicated that the Treasury would go on a buy-back program targeted at the long end of the yield curve in an attempt to shorten the term to maturity of the US Government's debt obligations. Treasury Secretary Summers indicated this week that this was not the case, rather the US Treasury would buy back issues across the curve with no particular focus on term-to-maturity. So much for the ten year and long bond auctions.

Of note this week, was the move by the Bank of England to raise interest rates by a further 25 basis points to 6%. The Bank cited the strength of economic conditions. In particular, the Bank of England has been focusing in on the tight labour markets and the increasing real estate prices. This will not be the last increase out of the Bank.

Evidence of a stronger European economy came this week via the German employment data. Unemployment fell in Germany to 10.1%, down 0.1% month-over-month. The majority of the move has been attributed to state funded job creation programs and an increased retirement rate.

Economic data continues to tell the same old story, that of strong economic output with marginal inflationary pressures. In Canada, housing starts fell 7.3% month-over-month in January. This was mainly attributed to weather conditions: after a very mild and dry December, January brought cold and snow. In the US, wholesale inventories rose 0.4% in December, wholesale sales rose 1.1% in December; new mortgage applications rose 4.8%; retail sales rose 0.3%; productivity rose 5% in the fourth quarter and 2.9% year-over-year; unit labour costs fell 1% in the fourth quarter after a 0.3% decrease in the third quarter.

Supply in both Canada and the US prevented the bond markets from getting too excited about anything this week. Starting the week well bid on the back of the continued technical squeeze, the market began to bleed off on supply. The Government of Canada issued $CDA 2.8 billion 5 year bonds that were fairly well received by the market. Supply in the US saw the US Treasury issue $US 12 billion 5 year bonds, $US 10 billion 10 year bonds, and $US 10 billion 30 year bonds. The first tranche went well, but the 10 year and 30 year bond auctions were sloppy. The US 10 year auction had a bid-to-cover ratio of 1.45 times and a 5 basis point tail, while the 30 year long bond auction had a 1.33 times cover and a 10 basis point tail. These were the worst bid-to-cover numbers in 7-10 years.

As Canada did not suffer the same type of supply, the Canadian long bond out performed the US market on the week. The Government of Canada 30 year long bond shed 2 basis points to close the week yielding 6.13%. In the US, the Treasury 30 year long bond added 5 basis points to yield 6.28%. The Canada/US 30 year spread narrowed in 7 basis points to -15 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets were mixed this week as the DJIA was hit hard, while the Nasdaq added to its gains for the year. New record high closes were set mid-week by both the Nasdaq and the TSE. The tech stocks continue to lead the market, with Toronto being referred to as 'Nasdaq North'.

Deals, deals and more deals this week as the consolidation within industries continues. In Canada, Rogers Cablesystem bought Videotron in a stock deal worth $CDA 6 billion and Corel bought Inprise, a Linux programming company, for $US 1.1 billion. The big deal of the week was the announcement that Pfizer would buy Warner-Lambert for $US 92.3 billion.

The tech stocks continue to dominate equities this week. By way of example, Research in Motion, a company with $CDA 200 million in sales traded with a market capitalization of $CDA 11 billion this week. Nortel Networks surpassed Lucent Technologies in market capitalization this week. Investors are paying up for both risk and potential future earnings in the current market.

In Toronto, the TSE finished down 52.50 points, or 0.57%, to close at 9156.70. Mid-week, the TSE broke through and closed above the 9300 market for the first time. The DJIA finished the week down 538.89 points, or 4.91%, to close at 10,425.21. The S&P500 fell 2.62% to close at 1387.12. While the Nasdaq was the hero of the week as investors continue to pour money into tech and telecom stocks. The Nasdaq posted a 151.31 point rise, or 3.57%, to close the week at 4395.45.

Next week brings speeches by Bank of Canada Governor Thiessen and the Humphrey-Hawkins testimony of Federal Reserve Board Chairman Alan Greenspan. Both speeches will be watched closely for any signs of impending interest rate action. Also, in the US CPI and PPI data will be released, and at time of writing is expected to be market neutral. Good trading.

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