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Weekly Wrap-UpMarch 20-24, 2000 |
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Weekly Wrap-UpMarch 20-24, 2000 |
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The North American bond markets felt the sting of central bank interest rate moves this week. Flight to quality trades occurred as the week wore on as comments out of Treasury officials had the markets nervous. A recision of these comments saw the bid leave the market at the week's end, leaving the bond markets virtually unchanged.
The Federal Reserve Board met Tuesday this week and did the expected. The Fed Chairman Alan Greenspan raised Fed Fund rates 25 basis points to 6.00%, and the Discount Rate 25 basis points to 5.50%. The move by the Fed was quickly followed Wednesday morning by the Bank of Canada. The Bank raised rates 25 basis points as well, to have a posted rate of 5.50%. Prime rates in Canada are now posted at 7.00%. The market was relieved by the gradualist approach which the Fed Chairman took, a move of 50 basis points would have shocked the markets.
Next weeks OPEC meeting played on the markets all week as oil remained volatile. Many OPEC and non-OPEC aligned countries have made statements about the need to increase output. The main stumbling block is that there are those in the OPEC nations that fear an increase in production will cause a significant decrease in prices, while others maintain that if supply is not increased there will be a significant decrease in demand as oil is priced out of the reach of recovering economies around the globe. Look for an marginal increase, but, unless there is significant cheating on the new quotas, not large enough to meet current requirements.
Economic data released this week was light, with the primary focus being centred on the Fed and Bank of Canada. In the US, durable goods orders declined 2.3% month-over-month, up 7.3% year-over-year; the trade deficit came in as the largest on record at $US 28 billion in January from $US 24.6 billion in December. In Canada, the trade surplus rose to $CDA 4.53 billion up from $CDA 2.74 billion in December.
Bonds had a roller coaster week, setting recent low yields in the long bond before selling off to close unchanged by the weeks end. Comments out of Treasury Undersecretary Gensler indicated that the US government may look at discontinuing support to Government Supported Entities. These are entities such as Fannie Mae and Freddie Mac, which issue huge amounts of bonds annually and depend on the implicit government support for low funding levels. The comments put a flight-to-quality trade in the market as investors sold corporate product and bought government debt. Once Gensler had rescinded the comments, government bonds gave up the quality premium.
In Canada, the 30 year long bond closed the week unchanged at a yield of 5.75%, after posting a 7 month low yield of 5.67%. The US Treasury 30 year long bond finished the week 2 basis points better bid at a yield of 5.98%, after rallying to a yield of 5.91%. The Canada/US 30 year spread has moved back into -23 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets revelled in the US Fed gradualist rate increase action. Many equity managers are indicating that they believe the Fed is nearing the end of it's interest rate increase cycle. Enthusiasm over the Fed and Bank of Canada increasing rates 25 basis points saw all markets rally substantially, with the TSE closing above 10,000 for the first time in history.
Central bank vigilance against the potential tide of inflation has provided support to the equity markets. This week's rally included almost all sectors of the markets. Banks, telecoms, cable, consumer products all benefited from the rally. Belief that central banks will stay ahead of the inflation curve is helping the markets move higher.
Rogers Cable and Shaw Cable swapped assets in Canada in a deal designed to build clusters and compete against Bell Canada. The two companies indicated that they would cooperate in building a national internet network through fibre optics and cable. General Motors caught a bid on rumours that News Corp was going to make an offer for the auto maker. News Corp may be interested in the satellite communications network found in GM's Hughes division. Johnson & Johnson was hurt by news that it would stop sales of its heart medication drug in the US due to "serious" side effects.
The TSE posted the largest gains of the majors on the week adding 523.87 points, or 5.50%, to close at a record high 10,052.68. This was the first close above 10,000 for the TSE, which briefly traded above the magic number on Thursday. Two thirds of the gains were attributed to Nortel and BCE. The DJIA added 4.88%, or 517.49 points to close at 11,112.72. The Dow is still down 3.34% on the year, while the TSE is now up 19.48% year-to-date. The S&P500 added 4.30% to close at 1527.46. The S&P500 is now up 3.96% on the year. The Nasdaq added 3.44% to close the week at 4963.03, up 21.96% year-to-date.
Next week brings the OPEC meeting, which could cause some significant volatility in oil prices. Also, US GDP (revised), income, consumption, factory orders and Chicago PMI will be released. In Canada, industrial prices, department store sales and real GDP will be released. Good trading.
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