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Weekly Wrap-UpApril 17-21, 2000 |
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Weekly Wrap-UpApril 17-21, 2000 |
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The North American bond markets diverged this week due to supply. The bull trap discussed last week materialized at the week's outset, only to give to be mitigated in the US by supply factors. The reflex rally in the equity markets contributed to the bond sell-off early in the week. The Government of Canada auctioned $CDA 1.9 billion 30 year long bonds, and announced a 10 year bond auction for the upcoming week. In the US, the Treasury announced and executed a $US 2 billion buy back of 2020-2025 dated bonds.
In Italy this past week, Prime Minister Massimo D'Alama resigned after losing a confidence vote. This is the 57th Prime Minister to hold and lose the position since the end of World War II, talk about political stability!!!
On the monetary front this week the Reserve Bank of New Zealand raised interest rates 25 basis points. That brings the central bank rate to 6.00%. The bank noted increasing inflationary pressures as the main reason for the rate hike.
Federal Reserve Board Chairman Greenspan indicated that the corporate bond yield, as opposed to the supply distorted Treasury yield, has responded to the Federal Reserve Board's tightening monetary stance, and were moving in the "right direction". Do not be fooled, the Fed is not finished yet, and investors should expect more rate hikes as the year progresses, although not so many as to force an economic slow down going into an election.
Economic data released this week was thin, and did not shed any new light on when any future Fed action would take place. In Canada, CPI rose 0.5% month-over-month (m/m), and 3.0% year-over-year (y/y) in March; existing home sales rose 6% m/m in March. In the US, the trade deficit rose $US 29.2 billion, a new record, with imported oil prices up and exports down. This should be negative for the $US, but as long as the $US is the global de facto currency there is little concern for its strength.
The bond markets used the equity market recovery early in the week as a trigger for the bull trap, as rates shot up 8 basis points in Canada and 15 basis points in the US. Supply discrepancies on either side of the border did the work for the rest of the week. In Canada, the government issued $CDA 1.9 billion long bonds. The auction had a solid 2.2 times bid-to-cover ratio, but a sloppy 5 basis point tail. This hurt the performance of the Canadian long bonds. In the US, the Treasury announced and executed a $US 2 billion buy back of 2020-2025 dated debt. The on going buy back program in the US, combined with expectations of larger retirements in the future as tax receipts rise, put a bid back in the long bond.
After having its nose bloodied early in the week, the Government of Canada 30 year long bond continued to get beat up, closing the week at 5.86%, up 14 basis points on the week. The Canadian market faces 10 year supply next week, so don't expect a large recovery in yields. In the US market, the Treasury 30 year long bond added a mere 4 basis points to close at 5.83%, after being hit hard at the outset. Investors south of the border have to soak up $US 12 billion in 2 year notes this week. Supply, supply, supply.
The North American equity markets stagged an impressive relief rally, after the previous week's serious market melt-down. Several strong earnings reports, which exceeded the Street's whispered expectations, provided the initial impetus. Recommendations from dealers DLJ, CIBC WM, and Bank of America to increase portfolio exposure to equities helped do the rest.
After the pounding the markets took last week, with more than $US 1 trillion in value shed last Friday alone, the equity markets were set for a reflex rally. Such a sell-off sets up the markets for some bottom fishing, with the belief that the move is over done and a reversion to the mean must occur, therefore buy. This is a tested pattern and does not lead to a full recovery of previous index levels. Instead the rally will falter, and sellers will re-emerge. That began to happen Thursday, and the market may have been saved from another beating as a result of the Easter Holiday shortened session. The market was closed Friday, and Europe will be closed Monday, with a lot of North American investors taking Monday off for an extended holiday. Markets will be thin and easily moved early next week.
The TSE finished up 486.18 points, or 5.74%, at 8959.69. The Toronto exchange posted its largest two day gain since October of 1987. The DJIA added 5.21%, or 536.73 points, to close at 10,844.05. The S&P500 tagged along with a similar 5.69% rise to close at 1434.51. The Nasdaq recouped 322.59 points to close up 9.71% at 3643.88. There is still more downside risk, so caveat emptor.
Next week brings a supply of government bonds on both sides of the border. In Canada, there will be a new 10 year issue auctioned. The US will auction $US 12 billion in 2 year notes. Economic data is thin, but important to Fed watchers. Canadian investors will get to see retail sales and February GDP figures, while their southern neighbours will get durable goods, first quarter GDP, and the employment cost index (ECI). The ECI will be the focus, as the tight labour markets in the US are the Feds big inflationary concern. The equity markets are not finished with their volatile action. Good trading.
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