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Weekly Wrap-UpMarch 6-10, 2000 |
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Weekly Wrap-UpMarch 6-10, 2000 |
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The North American bond markets sat on the sidelines this week, as the equity markets provided much more excitement for investors. Neither economic data nor several speeches by Federal Reserve Board Chairman Alan Greenspan, and Bank of Canada Governor Gordon Thiessen, could move the bond market significantly. The technical picture paints a topish bond market, with some analysts indicating that strong inflation data to be released in the coming week could be the catalyst to a down draft.
In several speeches given this week Federal Reserve Board Chairman Alan Greenspan maintained his assertion that the Fed must remain vigilant to the threat of inflation. The Fed Chairman indicated that productivity gains tend to create "even greater increases in aggregate demand than in potential aggregate supply". Mr. Greenspan also took the opportunity to warn the American banking community to be careful with respect to new loans. The worst performing loans tend to be granted at the height of the economic cycle, and bankers are beginning to believe that the recent economic outperformance in the US is the norm for the economy. Concerns over the credit quality of the loan portfolios of US banks are hinted at in these remarks.
Comments made by Bank of Canada Governor Thiessen indicate that monetary policy is a difficult tool to exploit next to such a large neighbour. That sentiment has been interpreted to mean that the Bank of Canada will also remain vigilant in the face of inflationary pressure, and will likely match the next two moves by the Federal Reserve Board.
The Bank of Japan was seen intervening in the foreign exchange markets over the week. The concern for the Bank is the deterioration of the Euro/Yen rate. The BoJ would like to see the exchange rate remain above 100. The first intervention came at 100.95. It has been indicated that the Bank of Japan was in the market six or seven times propping up the exchange rate.
OPEC continues to have preliminary conversations prior to the formal meeting at the end of the month. An agreement is being forged in an attempt to increase production without sacrificing a significant amount in price. Non-OPEC nations would like to see an increase in production, as would several of the OPEC nations. However, Iran, and Iraq continue to oppose an increase in production. Oil inventories in the US are now at 23 year lows, and going lower. The current price of oil is no longer related solely to the cut back in global supply, it is also related to an increase in global demand as Asian and European economies recover.
Economic data released this week continues to indicate that growth remains strong on both sides of the border. In Canada, housing starts rose 11.9% in month-over-month (m/m) February, the highest figure since June 1994; capacity utilization rose to 86.8% from 85.5%, the largest reading in 12 years. In the US, the first revision to fourth quarter productivity numbers saw them revised up to 6.4% from 5.0%; unit labour costs were revised lower to -2.5% quarter-over-quarter, and +0.7% year-over-year, the lowest annualized figure since 1976.
The Canadian bond market faced supply from both corporate issuers and the Federal Government. The corporate calender was light, and well received. The deals priced this week came at the tight end of their advertised spreads and were increased in size to meet investor demand. The Bank of Canada issued $CDA 3.2 billion 2 year bonds. The auction went well, as the Street did a good job making the sector look cheap ahead of the auction. Look for any new supply to be agency deals, securitized transactions or hybrid securities aimed at cleaning up corporate balance sheets.
The Government of Canada 30 year long bond added two basis points in yield to finish the week at 5.84%. In the US, the Treasury 30 year long bond added 3 basis points to close the week yielding 6.15%. The Canada/US long bond spread stands at -31 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets had a divergent week again, as the tech and telecom laden 'new economy' exchanges outperformed those branded 'old economy' markets. Earnings warnings and computer system shut-downs contributed to the volatility on the week. Fed Chairman Greenspan's continuing call for Fed vigilance is hurting companies with cash flows and helping those with no earnings.
Proctor & Gamble, the largest consumer products firm in the world announced this week that it would not meet analyst expectations for the upcoming quarters earnings. The stock was hammered by disappointed investors who require stocks to meet, at a minimum, or exceed analyst earnings expectations. The move lower by P&G tarred the entire consumer products group with the same brush, pulling others down with it. 'Bricks' get beaten back.
The TSE suffered from a trading delay and then a mid-day trading halt this week as the computer systems were overloaded. The Exchange maintains that the equipment can handle the volumes without difficulty, the flaws lie elsewhere. Whether that is true or not is not important. What is important is that the capital markets run efficiently. If the markets do not run efficiently, then issuers will look to other markets which will. This may mean the relocating of Canadian companies in the US in order to list and trade on the US exchanges. This wouldn't help stem the brain drain if it were to occur.
The TSE added 24.24 points on the week to close at 9487.14, up 0.26%. The Toronto exchange set a record high close early in the week, but could not recover to those levels. Toronto has gained 12.76% so far this year. The Dow Jones Industrial Average lost 438.38 points, or 4.23%, to close at 9928.82. The Dow is down 13.64% year-to-date. The S&P500 closed at 1395.07, down 1%, putting the exchange down 5.15% year-to-date. Again, the performer of the week was the Nasdaq, which added 2.72% to close above 5000, at a record high 5048.62. The Nasdaq is up 24.07% so far this year.
Next week brings a host of economic data in both Canada and the US. The most closely watched will be the inflation data released mid-week. The Canadian market also faces bond supply, as the Government issues $CDA 2.6 billion this week. The liquidity in some markets may be wanting, as many investors are away from thier desks with school break. Good trading.
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