 |
Weekly Wrap-UpApril 24-28, 2000 |
 |
|
Weekly Wrap-UpApril 24-28, 2000 |
|
The North American bond markets posted a modest loss on the week. The Canadian market digested supply, while the US market was not as impressed with the US Treasury buy back as it had been earlier this year. Economic data, and a volatile equity market prevented bond investors from getting overly enthusiastic. The markets, having seen the ECI figures, are focused on the upcoming non-farm payrolls number in the US, and the Federal Reserve Board meeting May, 16.
The Federal Reserve Board will be raising rates again this year, the only question is by how much. At the beginning of the week he market was discounting a 25 basis point hike at the next meeting and a 40% possibility of a further 25 basis point move in June. By the end of the week, having viewed the economic data the markets were talking about a 50 basis point move in May, followed by a 25 basis point move in June. Given the fact that non-interest related spending by the US government has risen 7% on a year-over-year (y/y) basis, there will be more than two more Fed monetary tightenings this year.
In Japan, the '0%' interest rate policy may continue for some time. Same store retail sales fell 4.5% on a y/y basis. This is the 23rd consecutive decline in the retail sales figure. This continues to point to a weak consumer. Until the consumer comes back into the Japanese economy, it will be tough for the country to export its way out of it's economic doldrums.
The European Central Bank raised interest rates in the European Union by 25 basis points, to 3.75%. This is the fourth interest rate increase in six months by the ECB aimed at defending the Euro. The Euro will remain weak as long as the Federal Reserve Board is still in a tightening mood, all global commodities are priced in $US, and capital flows continue to support US assets. Other issues in the EU such as the common agricultural policy, mobility of labour and the how the ECB and EU actually exercise their respective voting rights will continue to hamper the development of the Euro.
As a result of the back up in yields in the Canadian bond market over the past several weeks, the major banks in Canada have raised the rates they charge on mortgages. A five year fixed mortgage has risen 20 basis points to 8.55%. A year ago at this time, the same mortgage would have been advertised at 6.95%.
The economic data released this week put the 'fear of Greenspan' into the markets, as investors had grown complacent with the Feds possible actions. In the US, employment cost index rose 1.4% in Q1, rising 4.3% y/y - this is the largest increase in 10years; GDP for Q1 was +5.4%; personal consumption rose 8.3% - the highest since Q2-83; GDP deflator rose 2.7%; personal income rose 0.7% in March, personal spending rose 0.5%, personal savings rate rose to 0.4% from 0.2%.
In Canada, retail sales fell 1.1% month-over-month (m/m) in February, rising 4.9% y/y, GDP fell 0.4% (m/m) in February - primarily auto shipments causing the decline; trade surplus rose $CDA 3.9 billion, a 14% m/m decline, with imports down 1.2% and exports down 2.6% - on a y/y basis exports have risen 12.6%.
The bond markets held in fairly well in the face of volatile equity markets, and supply/demand forces internally. The Canadian market face $CDA 2.6 billion of new 10 year supply, which was well received in the market. The new 10 year had a 2.68:1 bid to cover ratio and a tight 1 basis point tail. This is impressive when compared to the $US 3 billion redemption by the US Treasury of bonds dated 2018-2025. Given the US market response to the increased size of the buy-back, there only appears to be one supporter of the Treasury market at present.
The Government of Canada 30 year long bond added 7 basis points to close the week yielding 5.93%. The US Treasury 30 year bond posted a 13 basis point increase in yield to close the week at 5.96%. The US long bond traded briefly above 6% interday this week and failed to rally on equity market weakness. There is technical exhaustion in the long bond and a break above 6% will signal further weakness in the bond market. (A basis point is 1/100th of a percent.)
The North American equity markets faced another volatile week. Stocks were bounced around by earnings announcements and warnings. Litigation continues to play a factor, as Microsoft remains front and centre. The strong economic data released this week also pushed the equity markets around. Results out of Nortel, Ericsson and Nokia helped techs this week.
Microsoft started the week off an a sour note with the release of weaker than expected third quarter revenues as business sales declined. As well, the company continues to face litigation risk in its anti-trust suit with the US Justice Department. The latest proposal will see the software giant split into two companies. If this is ordered, look for Microsoft to appeal and keep the whole mess in front of the courts for years to come.
Uncertainty makes for interesting markets, and disappointments make for bad markets. Proctor & Gamble and 3M announced that earnings would be weaker than forecast. This sent the two blue chips lower in a hurry.
Strong results reported this week by Nortel, BCE and JDS Uniphase contributed to the Canadian market rise. As well, the BCE shareholders approved the share split of BCE shares into BCE and Nortel shares at the annual general meeting. Hollinger, Conrad Black's company, announced that it intended to divest itself of its community news paper holdings. This announcement comes only months on the heels of Thomson Corp. announcement to do the same. Is Hollinger an industry follower or leader? Trimark Financial announced that it was in talks with a potential suitor, with the rumour mill touching on the Boston based Putnam Investments. Laidlaw announced large write downs of its Saftey Kleen and emergency services divisions, ouch.
The Montreal Exchange announced a partnership with the Nasdaq this week. The Montreal Exchange will allow Canadian residents to trade US companies listed on the Nasdaq in $US only. This will help the exchange replace the common stock trading which left Montreal with the reorganization of the Canadian exchanges. The Quebec politicians were quick to boast of the access to capital that Quebec firms will now have. The separatist rhetoric never stops.
The TSE added 387.92, almost solely on Nortel, this week. The Toronto Exchange rose 4.33% to close at 9347.61, pushing the year-to-date (ytd) return to 11.10%. The DJIA lost 110.14 points, or 1.02%, to close at 10,733.91. The S&P500 added 1.25%, closing at 1452.43. While the Nasdaq finished 5.95% higher at 3860.66. The DJIA, S&P500, and Nasdaq are now down 6.64%, 1.14% and 5.13% year-to-date, respectively.
Next week brings the all important non-farm payrolls data in the US and the employment data in Canada, Friday. There will be other data releases early in the week which will add some colour to the markets, but the employment numbers will dominate. Good trading.
Weekly
Wrap-Up Archives
The
Markets Page
The
Financial Pipeline Homepage