 |
Weekly Wrap-UpApril 10-14, 2000 |
 |
|
Weekly Wrap-UpApril 10-14, 2000 |
|
The North American bond markets enjoyed a strong flight-to-quality trade in the face of the equity market melt-down. Rumours of another round of Federal Reserve buying of long-dated US Treasuries also added to the bid. Inflationary economic data took some of the lustre off bonds, pushing them slightly higher in yield than at the end of last week's session.
Federal Reserve Board Governor Meyer spoke to a conference in Toronto this week. Governor Meyer re-affirmed his stance as an inflation 'hawk', indicating that demand continues to stretch potential supply in the US. The Fed Governor also acknowledged the gradualist approach being utilized by the Fed is appropriate. He is concerned that the increasing valuations of the stock market, combined with a stable $US, is leaving monetary conditions accommodative at present. His remarks also indicated that the interest rate hikes initiated by the Fed since June of 1999 have done little to slow demand. Look for further interest rate increases this year by the Fed.
Economic data released this week south of the border revealed nothing new. The US economy is skipping along at break-neck speed. In the US, retail sales rose 0.4% month-over-month (m/m), and grew 1.4% ex-autos; industrial production rose 0.3%; factory output rose 0.4%; capacity utilization remained high at 81.4; headline PPI rose 1.0% m/m, and 0.1% core, leading to a 4.5% increase year-over-year (y/y) and 1.2% increase in the core rate; CPI rose 0.7% m/m, with core up 0.4% m/m, showing a 3.7% headline increase y/y, and a 2.4% core y/y increase.
The bond markets rallied early in the week on a flight-to-quality trade and rumours that the Federal Reserve Board would use tax receipts to increase the amount of long-dated Treasury debt outstanding. The early week rally was also attributed to the last of the weak 'short' positions throwing in the towel, setting up a classic bull trap. Watch for a sell-off in bonds regardless of equity activity. As the week progressed, economic data indicating growing inflationary pressures mitigated the flight-to-quality trade established by the equity market sell-off.
The Government of Canada 30 year bond added 3 basis points of yield on the week to close at 5.72%. The US Treasury 30 year long bond added 9 basis points to close yielding 5.79% after a see-saw session of equity vs. inflation activity. The Canada/US 30 year spread pushed a further 6 basis points negative to end the week at -7 basis points. (A basis point is 1/100th of a percent.)
The North American equity markets took it on the chin this week, as nervous investors sold their tech and telecom holdings to buy cyclicals. The momentum begun two weeks ago to a reduction in portfolio exposure to techs continued with a vengeance this week. The Nasdaq saw its largest one-day decline Friday, loosing 9.67%. The US equity markets' lost approximately $US 1 trillion in value Friday alone. Inflation data was the trigger this week, taking the roll over from last weeks trigger - Microsoft.
Motorola also provided the impetus for selling pressure in the tech sector as the company began to manage down the Street's expectations for second quarter profits. Research in Motion was hammered this week loosing over 40% of its value in one day, as the company indicated it would have to advertise to sell its product. Microsoft continues to wear the goat horns as a New York analyst issued a caution with respect to the company's future earnings potential. The week was not a good one for the techs. Many of the high techs and telecoms are off more than 70% from their highs over the last several weeks. The volatility will continue.
The TSE lost 991.68 points, or 10.48%, to close at 8473.51 on the week. The TSE is now 15.71% below its record high set on 24 March 2000. The DJIA fared somewhat better only shedding 804.16 points, or 7.24%, to close at 10,307.32. The S&P500 lost 10.49% on the week, down 11.14% from its recent high. While the goat of the week goes to the Nasdaq. The tech laden exchange shed 1125.16 points, or 25.30%, to close at 3321.29. The Nasdaq has lost 34.21% of its value since its high set on 10 March 2000.
Next week will probably see a bounce in the equity markets, given the magnitude of the decline. However, the Federal Reserve Board and the Bank of Canada are still in monetary tightening mode, so the markets have not seen an economic slow-down impact earnings yet. There is more down side risk to the equity markets over the near-term. The bond markets are set up for a classic bull trap, so look for a correction in bonds. Good trading.
Weekly
Wrap-Up Archives
The
Markets Page
The
Financial Pipeline Homepage