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Weekly Wrap-UpApril 3-7, 2000 |
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Weekly Wrap-UpApril 3-7, 2000 |
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The North American bond markets had a strong bid to them as the flight-to-quality trade emerged in tandem with the equity market volatility. Continuing rumours of US Treasury buybacks of existing long-term debt have also aided in the support of the bond market. The real force supporting the bond markets is concern over the current strength of the equity markets and the future of corporate earnings.
Japan was in the news this week for issues other than economics. Prime Minister Obuchi suffered a stroke and slipped into a coma. This caused Yoshiro Mori to be appointed Prime Minister. Mr. Mori selected a new cabinet and is expected to continue the policies initiated by Prime Minister Obuchi. Expect elections in Japan before the G-7 Summit, to be held in July. On a more up beat note, Japanese household spending increased 4.3% year-over-year (y/y) in March, indicating that the consumer may be taking the first tentative steps back into the economy.
Federal Reserve Board Chairman Alan Greenspan spoke at the White House mid-week. Mr. Greenspan indicated that the Fed, still concerned about aggregate demand and supply imbalances, would continue on a gradualist path of monetary tightening. The Fed Chairman also told the assembled group that an increase in short-term rates would not have a significant impact on equity valuations. And the equity markets go bid.
On the monetary front, the RBA in Australia raised interest rates 25 basis points to 5.75% last week. The move comes after a significant run on the $AUS. The central bank looks to be propping up the currency with interest rate moves, something the Bank of Canada has done in the past.
Economic data released this week indicated that neither the Fed nor the Bank of Canada are finished with increases in the interest rate cycle. In Canada, motor vehicle sales rose 7.7% y/y in March; building permits fell 14.5% month-over-month (m/m), but have risen 21.5% y/y; unemployment remained at 6.8% in March due primarily to an increase in the labour force. In the US, construction spending rose 1.5% in February m/m; NAPM was 55.8, with the prices paid component rising to 79.8 from 74.1; non-farm payrolls rose 416,000, with unemployment unchanged at 4.1% as the labour force expanded; hourly earnings rose 0.4%; average workweek was 34.5. Who works an average work week? What do they do?
The bond markets shrugged off concerns about the increasing interest rate environment, taking solace in the gradualist approach reinterated by the Fed Chairman, and rallied on a flight-to-quality trade initiated by a melt-down in the equity markets. Concerns are being raised about the quality of earnings going forward, causing corporate and agency bonds to underperform government bonds.
In Canada, the Government of Canada 30 year long bond shed 5 basis points on the week to yield 5.69%. The US Treasury 30 year long bond rallied 13 basis points on the week to close at 5.70%. The Canadian long end is underperforming the US long bond due to supply differences. The Canadian market will see long supply April 19, 2000, while the US long end is anticipating a continued decrease of supply through government buybacks on increased tax receipts. The Canada/US 30 year spread moved into -1 basis point from -9 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets saw a volatile week with the Nasdaq down 13.6% and the TSE down 7.7% interday, with a strong recovery into the week's end. Microsoft was the catalyst, as the anti-trust suit against the company may result in the break-up of the software giant. The bricks vs. clicks divergence is reversing as companies from the cash-flow-positive economy are getting investors attention at the expense of companies from the cash-flow-negative economy. There are a lot of high tech IPO's coming out of lock-up in the quarter, so beware of what appears to be cheap tech and telecom companies. Insiders may be sellers in an effort to diversify their personal holdings.
Microsoft took centre stage this week, as the software giant failed to come to an agreement with the Department of Justice in its anti-trust suit. Abuse of the company's monopolistic power in the operating system area involving Microsoft's internet platform has lead to speculation that the company will be broken up. If it occurs as it did with AT&T, then investors may make out very well. If the break-up occurs in a manner which would mean the various software components would not be as easily available in a seamless format, consumers and investors may suffer. A tough call for the Department of Justice, and ultimately for investors. Mr. Gates lost approximately $US 12.5 billion this week, on paper. Ouch!
Stocks recovered somewhat into the week's end on the back of comments from the Federal Reserve Board Chairman related to the need for vigilance and a gradualist approach to correcting the imbalances between aggregate demand and supply. Also, words from US President Bill Clinton calmed the biotech sector. President Clinton indicated that companies should be able to patent privately financed gene research discoveries.
The TSE added 2.80 points on the week, to close virtually unchanged at 9465.19. This is impressive considering that the Toronto exchange was down 7.7% at one point early in the week, and remains up 12.50% year-to-date. The TSE would have had a better close, had there not been a series of program selling of the index with only minutes to go before the close on Friday. The DJIA added 189.56 points, or 1.71%, to close the week up at 11,111.48. The S&P500 also closed in positive territory, up 1.19% at 1516.35. The Nasdaq was unable to scramble back into the black by the end of the week. The tech laden Nasdaq finished the week down 126.38 points, off 2.76%, at 4446.46. This is still a substantial recovery from its losses early in the week.
Next week will bring more volatility in the equity markets, as inflation related economic data will be released in both Canada and the US. Look for CPI, PPI and industrial production data to be of key interest to the markets next week. Good trading.
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