Weekly Wrap-Up May 31 - June 4, 1999

The bond market continued to lose ground during a US Memorial Day shortened week. Concerns that the Federal Reserve Board will raise interest rates at its next meeting have participants sidelined, waiting for higher yields. The market is currently pricing in a complete rate increase cycle, as opposed to a slight tightening of monetary conditions. At its current pace, the market will do most of the Fed's work for it, as was the case in 1996 when a shift in bias saw the market sell-off significantly without any Fed action. The North American equity market experienced a week of relative strength. Golds and financial services firms were hurt by the move in bullion and interest rate concerns. The internet and high tech sector benefited from the belief that the market has over reacted in the past several weeks, with some bottom fishing going on. Beware of firms with no cashflows consolidating other firms with no cashflow based on current speculative stock prices.

The North American bond market continued to lose ground during a US Memorial Day shortened week. Concerns that the Federal Reserve Board will raise interest rates at its next meeting have participants sidelined, waiting for higher yields. The market is currently pricing in a complete rate increase cycle, as opposed to a slight tightening of monetary conditions. At its current pace, the market will do most of the Fed's work for it, as was the case in 1996 when a shift in bias saw the market sell-off significantly without any Fed action. Supply concerns also have the market jittery. As interest rates increase, corporate issuers are going to try and tap the market before absolute rates increase their cost of capital. Look for issuers to try and borrow long-term money, while lenders want to lend short-term. Supply and demand imbalance will mean some cheap corporate bonds will emerge.

Federal Reserve Board Assistant Chair Alice Rivlin resigned form the Fed this week. Ms Rivlin will take a position at the Brookings Institute, where she may pursue research. The Fed assistant Chair was a notable dove on inflation, believing in the new economic paradigm. This could mean that the hawks rule the roost at the next Fed meeting, June 29.

Russia managed to default on another $US 26 billion in Soviet era debt. This was not unexpected, however it underlines the difficulties which face the Russian economy.

In Venezuela, the economic conditions continue to deteriorate. The country announced that due to the cut-backs in oil production there have been 400 private oil firms close down. This results in more unemployed, not spending money in the economy, contracting consumer demand, and deepening the recession.

Gold continues its downward spiral as the July 6 date of the first tranche of gold sales by the Bank of England has the market spooked. Concern that supplies out of Australia will keep the market weak continue, as producers try to lock-in some forward sales of current production.

The Ontario Provincial elections held this week saw the Progressive Conservative Party of Premiere Mike Harris re-elected to a second majority government. This is the first time in 30 years that a political leader has formed back-to-back majority governments in Ontario. Premiere Harris' message of right wing values and sound management has lead to the Conservatives victory.

Economic data this week painted a mixed picture on the inflation front. In Canada, the GDP figures for March were +0.3% month-over-month, with a 3.4% annualized increase; unemployment fell from 8.3% to 8.1% in May, the employment number dropped 14,000 but the labour force declined as well; employment rose at a 3.1% annualized rate. In the US, factory orders fell 1.2%; new home sales rose 9.2%; new home prices rose at an average annualized rate of 9.3%; NAPM rose to 55.2 from 52.8, with the prices paid component up to 52.2 from 49.9; non-farm payrolls rose 11,000, with the unemployment rate falling to 4.2% from 4.3%, non-farm payrolls were revised up 185,000 jobs for April; wages rose 0.4% month-over-month or 3.6% on a year-over-year basis.

The Canadian bond market suffered from government and corporate supplies this week, while the US continues to suffer from a weak technical picture and a fear of corporate supply and Fed rate increases. As well, rumours of a move by the Japanese to cut the domestic consumption tax hurt the market due to concerns of increased global supply. Corporate bond spreads moved wider this week in the investment grade sector as a couple of large deals spooked the market to the threat of an increase in near-term supply.

In Canada, the Government of Canada 30 year long bond added 12 basis points in yield to close the week at 5.68%. In the US the 30 year Treasury bond added 13 basis points in yield to close at 5.97%. The Canada/US 30 year spread is not at technical resistance levels of -29 basis points, and should see the Canadian long end underperform the US in the short-term. (A basis point is 1/100th of a percent.)

The North American equity market experienced a week of relative strength. Golds and financial services firms were hurt by the move in bullion and interest rate concerns. The internet and high tech sector benefited from the belief that the market has over reacted in the past several weeks, with some bottom fishing going on. Beware of firms with no cashflows consolidating other firms with no cashflow based on current speculative stock prices.

The rally in the equity markets was restricted to the relatively large cap stocks. As we fast approach the new millennium, investors are paying for liquidity in case they need to raise cash ahead of the new year. The Y2K scare could hit the equity markets at a time when investors will believe that cash is king.

The TSE added 137.44 points over the course of the week, posting a 2.02% gain, to close at 6490.14. The Toronto exchange has risen 7% year to date, and remains 11.28% below its highs. The DJIA added 240.10, gaining 2.27%, to close at 10,799.84. The Dow is up 17.63% so far this year. The S&P 500 posted a 1.99% gain, putting it up 8% on the year, while the Nasdaq rose 2.04% for the week making it up 13.03% year to date.

Next week brings a full week of trading back to the North American markets, as well as many analysts, traders, and investors who had been off last week preparing for the CFA exam. Economic data next week include housing starts, capacity utilization and GDP in Canada, while the US will release wholesale sales and inventories, retail sales and PPI. Look for PPI to be the big number for the week, as the market attempts to determine the Fed's next move. Good trading.

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