Weekly Wrap-Up June 19-23, 2000

The North American bond markets sold off on thin volumes and technicals, as investors shunned bonds ahead of the FOMC. Next Tuesday and Wednesday the Federal Reserve Board meets to discuss monetary policy and the US economy. At present the front end of the yield curve is not pricing a high probability of an increase in short-term interest rates. The equity markets were mixed on the week with little conviction ahead of the Fed. In Toronto two record highs were set early in the week before the profit taking started. Investors were not anxious to be too far from home before the FOMC meeting. There is a significant amount of uncertainty at this FOMC meeting as the market has not developed a consensus as to what the Fed intends to do.

The North American bond markets sold off on thin volumes and technicals, as investors shunned bonds ahead of the FOMC. Next Tuesday and Wednesday the Federal Reserve Board meets to discuss monetary policy and the US economy. At present the front end of the yield curve is not pricing a high probability of an increase in short-term interest rates.

Whether feeling the inflationary pressures of a booming economy, or trying to stay ahead of the Fed, the Swiss National Bank raised interest rates 50 basis points this week. The increase in rates brings interest rates up 125 basis points since January.

The big meeting of the week was OPEC. The oil consortium agreed to increase production by 708,000 barrels per day in an effort to decrease the price of crude amid high demand. As the global economy heats up, there are concerns that the price of oil will depress the economic expansions being born in Asian and Europe. The US economy could use a little cold water in the form of higher fuel prices to help slow the economic expansion. The problem may be that the OPEC nation, which produce 40% of the worlds oil supply, may not be able to meet the full increase. Some analysts have speculated that the cartel can only produce another 300,000 barrels per day due to their own supply constraints. Oil was higher on the week, so the increase in supply did little to help.

Economic data was thin this week, as investors await any hint of direction the Fed might take. The US trade deficit came in at a larger than expected $US 30.4 billion. Big. The trade deficit has been offset by the continuing flow of investment capital into the US. If this dries up, so too does the $US. In Canada, the trade surplus was $CDA 3.2 billion, down form $CDA 4.1 billion due to a decrease in energy prices; retail sales dropped 1.2% month-over-month in April, declining a smaller 0.5% ex-automobiles.

Technical levels, thin markets and increasing oil prices pushed bond yields higher this week. As the US long bon approached 6.00% sellers were seen running stop-loss levels. With the Federal Reserve Board meeting next week, and rising oil prices in the face of increased OPEC supply, there was little support for the market.

The Government of Canada 30 year long bond added 19 basis points to close the week yielding 5.69%. In the US, the Treasury 30 year long bond added 17 basis points to close at 6.04%. The US faces a $US 10 billion 2 year auction next week, on the final day of the Fed's two day confab. Since bids go in before the FOMC meeting has come to a close, look for the auction to be a little sloppy.

The North American equity markets were mixed on the week with little conviction ahead of the Fed. In Toronto two record highs were set early in the week before the profit taking started. Investors were not anxious to be too far from home before the FOMC meeting. There is a significant amount of uncertainty at this FOMC meeting as the market has not developed a consensus as to what the Fed intends to do.

Honeywell hurt the US market as it reported that the second quarter results would be weaker than analysts predictions. Profit and earnings warnings are punished by investors, as Honeywell sold off 17% the day of the announcement. Nortel and H-P rose on the announcement of a cooperation agreement between the two technology giants. Seagrams continued to do well on the Vivendi deal, although portfolio managers are concerned that a company with a 3% weighting on the TSE will be removed from the index. Amazon.com was hammered into the end of the week as two negative analyst reports were issued which indicated that the internet book et al. seller was likely to run out of cash in the next 12 months.

The TSE rose 55.43 points, or 0.55% to close up at 10,091.09. The TSE is now up 19.94% year to date. In the US, the DJIA shed 44.55 points, or 0.43% to close down at 10,404.75; the S&P500 closed at 1441.48, down 1.57%; the Nasdaq closed down 0.38% at 3845.34. The major US stock markets are all in negative territory so far this year.

Next week brings little in the way of data to the market. This is going to make the markets thin and jittery ahead of the Tuesday and Wednesday FOMC meeting. Good trading.

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