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Weekly Wrap-UpFebruary 21-25, 2000 |
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Weekly Wrap-UpFebruary 21-25, 2000 |
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The North American bond market began the slow process of curve normalization this week. The yield curve in both Canada and the US have been inverted for the past several weeks. This is particularly true of the long end of the yield curve. Portfolio managers have been buying long bonds and t-bills on anticipation that the Federal Reserve Board will retire long bonds, thereby curtailing supply. Perceived scarcity breeds perceived value. This week saw the long bond in the US hit the 6% barrier and start selling off, while the rest of the yield curve held in. Weakness in the equity markets added to investor desire to own 5-10 year bonds.
In an interesting article seen this week, it was postulated that the Fed is not usually successful in slowing down the domestic economy until the Fed Funds rate exceeds the prevailing rate of economic expansion. The article also went on to state that the Fund rate usually must exceed the growth rate by 50 basis points. If there is substantial empirical evidence to back this up, there will definitely be more than one more Fed rate hike this year. The Bank of Canada will be sure to follow any Fed action with a similar move of their own.
Economic data released this week in Canada, and the US, point to a strong economy, with little sign of letting up. In the US, existing home sales fell 10.7% month-over-month (m/m) in January; durable goods orders fell 1.3% m/m in January, down 0.5% ex-transportation (decreased aircraft demand offset the largest increase for industrial equipment in 15 years - rising 12.9%); fourth quarter GDP - first revision - rose to 6.9% from 5.8%, government spending rose 9.2%; GDP price deflator was unchanged at +0.2%. In Canada, CPI fell 0.1% m/m, core down 0.3% m/m, +2.3% year-over-year (y/y) with core up 1.4% y/y in January; retail sales rose 2% m/m in December, up 1.3% ex-autos; raw materials prices rose 0.5% m/m in January, up 30% y/y; industrial producer prices were unchanged in the month of January, rising 4.4% y/y. The good inflation data out of Canada have some investors speculating that the Bank of Canada will not match the next rate move by the Fed - ya, whatever.
The bond market was mixed this week in terms of performance. A successful 2 year note auction in the US saw many investors sell longer dated bonds and buy short bonds. The curve inversion, particularly at the long end of the yield curve did some significant unwinding this week. Accounts that were barbelled in anticipation of the Federal Reserve Board's buy-back program, rumoured to be targeted at the long end of the yield curve, were seen unwinding this trade to buy the belly of the curve.
The Government of Canada 30 year long bond shed 3 basis points over the week to close at a 5.88% yield. The US Treasury 30 year long bond finished the week yielding 6.16%, 1 basis point higher than last week's close. This after the Canadian long bond saw a low yield on the week of 5.78%, while the US Treasury 30 year bond posted a 6.08% low close this week. The Canada/US 30 year spread remains deep in negative territory at -30 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets had a volatile, mixed week. Tax season has investors selling value based mutual funds and investing in technology, biotechnology and money market funds. This trade activity is perpetuating the trading patterns witnessed in the markets for the past couple of months. Companies with cashflows are sacrificed to those which have little to no cashflow and are pure speculation plays. Valuations of these high tech/bio-tech stocks have reached a point were they are very vulnerable to a market correction.
Merger activity continued this week, as Alcatel of France announced its intention to pay $US 7.3 billion for Newbridge Networks. Also BCE announced its $CDA 2.3 billion hostile bid for CTV in Canada. The move is intended to increase the content available to BCE's internet provider Sympatico. Most analysts fell the move is a defensive one, rather than a progressive value added purchase.
The battle between bricks and clicks continued this week. The bricks were hurt by perceptions that increased interest rates would knock down earnings, while the clicks were not affected by concerns over increasing interest rates as they are free to speculate on potential future earnings.
The TSE closed down 1.66%, or 154.31 points, closing the week at 9141.20. The TSE is down 3.41% from its recent high, but is up 8.65% year-to-date (y-t-d). The DJIA was knocked down 357.40 points, or 3.50%, to close at 9862.12. This leaves the Dow down 14.22% y-t-d, and below 10,000 for the first time since April 1999. The S&P500 lost 0.95% to close at 1333.34, down 9.25% y-t-d. The Nasdaq continued its winning ways posting an increase of 4.50% to close at 4590.50. The Nasdaq posted two record highs this week and closed above 4600 for the first time. This tech heavy exchange is up 12.81% so far this year.
Next week brings a significant amount of US economic data particularly non-farm payrolls, along with Canadian GDP. Look for the bond markets to react negatively to economic data which surprises to the high side of expectations due to an over bought technical picture in long bonds looking for a reason to sell off. Good trading.
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