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Weekly Wrap-UpMay 22-26, 2000 |
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Weekly Wrap-UpMay 22-26, 2000 |
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The North American fixed income markets found a bid this week as economic data combined with thin holiday markets saw bonds rally. The Canadian bond market was closed Monday for the Victoria Day holiday, and the US market closed early Friday in anticipation of the Memorial Day holiday. The shortened week, combined with thin volumes allowed a short squeeze to push bond prices higher, as yields fell to recent lows. Investors and traders alike want to remain close to home as we head into next week's heavy slate of economic data, including non-farm payrolls.
The Japanese economy continues to appear mired in a recessionary funk. Economic data released this week indicates that the Bank of Japan will not likely stray from its current 'zero' interest rate policy. Nationwide department store sales dropped 1.1% year-over-year (y/y) in Japan, reaffirming the consumers lack of participation in the economy. The IMF has indicated that another round of stimulus initiatives may be a prudent path for the Japanese government to pursue.
Another of the recently tamed 'Asian Tigers', South Korea, appears to be continuing its climb out of recession. The first quarter GDP reported by the government showed growth of 12.8%. The economic surge came from increases in exports and capital spending. Positive news also came in the form of a significant drop in the unemployment data, which showed a 0.6% decline to 4.1%.
The US House of Representatives passed the normalized trade relations bill with China this week. This paves the way for the Chinese to enter the World Trade Organization (WTO). The passage of the bill is the largest trade victory for Clinton in 6 years, and is a nice piece of legislation to achieve in the twilight of his administration. The granting of normalized trade relations with China is another significant step in extending the long-term bull market in financial assets.
Economic data was thin this week, but it had a profound impact on the market. In the US, durable goods orders fell 6.4% month-over-month in April, falling the same amount ex-transportation. The majority of the index decline came from the 20% decline in electronic equipment orders. The decline in durable goods moved the bond markets higher in price as a result of investors moving to a more neutral stance with respect to up coming potential Fed action. Many investors are talking about a single 25 basis point increase for the rest of the year. Don't underestimate the significance of politics in the timing of any Fed moves.
Bonds caught a bid as the holiday shortened week came to a close. With a significant amount of corporate bond supply priced to take advantage of the June 1 coupon payments out of the way, the weaker than expected durable goods number caught many by surprise. The thin holiday markets aided those participating in the short squeeze. Nobody wanted to go home for the US long weekend short, and this caused the buying scramble Friday. With US non-farm payrolls at the end of following week the consensus opinion was to be close to home.
The US government auctioned $US 10 billion 2 year notes. The bonds were relatively well received with a 2.52:1 bid to cover ratio. There were $US 25.5 billion in maturities this week, meaning a net redemption of $US 15.5 billion in debt. Combine this redemption with another $US 2 billion buy-back program and a bid starts to crepe back into the market.
The Government of Canada 30 year long bond rallied 16 basis points to close at a yield of 5.68%. In the US, the Treasury 30 year long bond rallied 14 basis points to close at a yield of 6.06%. These levels are at the high end of the recent trading range, so look for a sell of into non-farm payrolls next week as economic data points again to a robust economy in need of a little cooling and investors have already put the June coupon payments to work. (A basis point is 1/100th of a percent.)
The North American equity markets were hit again this week as the markets search for a bottom. With little in the way of supportive mutual fund flows, the equity markets continue to drift lower in thin trading. Volumes on the big board remain well below the tree month average, indicating that investors remain sidelined. The significant amount of IPO escrowed shares coming into the market over the next two months will not be supportive for the tech sector.
Once again analysts are starting to talk about the need for fundamental analysis of the equity markets. Those of us brought up on the Graham and Dodes school of analysis are slowly coming back into vogue. Investors and market commentators are beginning to discuss the need for positive operating cash flows, not just the lure of potential cash flows at some distant point in time. Those stocks which are trading at high earnings multiples are still at risk for further correction.
High flying tech issues done while the market was still in a feeding frenzy for anything dot.com-ish are now being undone. In the month of June 2.8 billion shares with a value of $US 121 billion come out of escrow. The month of July provides an IPO escrow released supply of 1.3 billion shares worth an estimated $US 40 billion. Since the insiders granted these IPO shares have an effective zero cost base, they could be in the mood to sell some of this windfall in an effort to diversify their personal portfolios. Supply, supply, supply. Anyone interested in trying to catch a falling knife?
The TSE lost 272.26 points, or 2.93%, to close the week down at 9020.88. The DJIA fell 327.61, or 3.08%, to close lower at 10,299.24. The S&P500 was the best of a bad lot this week losing 28.93 points , or 2.06%, to close at 1378.02. Once again, the goat horns go to the Nasdaq which lost 185.29 points, or 5.47%, to close at 3205.11. The Nasdaq is currently at a 6 month low, trading at levels seen as recently as November.
Next week brings a host of economic data in both Canada and the US. The numbers include Canadian GDP, US new home sale, consumer confidence and non-farm payrolls. Any inflationary releases will move the markets lower as traders, investors and analysts struggle with the Federal Reserve Board's intentions for future monetary policy. Good trading.
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