Weekly Wrap-Up

August 16-20, 1999

The North American bond markets rallied this week thanks to a benign CPI number, although the markets remain skittish ahead of the Federal Reserve Board meeting August, 24. A larger than anticipated US trade deficit fueled the concern over further rate hikes, as the $US weakened over the week. A nervous $CDA had the Canadian market wondering how the Bank of Canada would react to any move by the Federal Reserve Board. The equity markets rose this week, with a strong day Friday being the key to finishing in the black for the 'Big Board'. Commodity based industries did better this week lead by oil and gas, paper, forestry and gold. The financials performed well on the belief that the recent sell off has been overdone. The equity markets feel like they want to move higher, but need conformation from the bond markets before they do.


TSE Change DJIA Change S&P Change Nasdaq Change
Monday 7045.65 39.49 11,046.79 73.14 1,330.77 3.09 2,645.28 7.47
Tuesday 7053.01 7.36 11,117.08 70.29 1,344.16 13.39 2,671.22 25.94
Wednesday 7042.46 -10.55 10,991.38 -125.70 1,332.84 -11.32 2,657.73 -13.49
Thursday 7098.08 55.62 10,963.84 -27.54 1,323.59 -9.25 2,621.42 -36.31
Friday 7129.22 31.14 11,100.61 136.77 1,336.61 13.02 2,648.33 26.91
% Change 1.76% 123.06 1.16% 126.96 0.67% 8.93 0.40% 10.52


GOLD Change $CDN/$US 30yr Cda Change 30yr US Change
Monday 260.90 -0.80 1.4832 5.92 unch 6.09 -1bps
Tuesday 262.10 1.20 1.4771 5.83 -9bps 6.02 -7bps
Wednesday 260.30 -1.80 1.4835 5.83 unch 5.99 -3bps
Thursday 259.40 -0.90 1.4945 5.85 +2bps 6.03 +4bps
Friday 258.30 -1.10 1.4952 5.83 -2bps 5.99 -4bps
% Change -1.30% -3.40 - -9 bps -11 bps


The North American bond markets rallied this week thanks to a benign CPI number, although the markets remain skittish ahead of the Federal Reserve Board meeting August, 24. A larger than anticipated US trade deficit fueled the concern over further rate hikes, as the $US weakened over the week. A nervous $CDA had the Canadian market wondering how the Bank of Canada would react to any move by the Federal Reserve Board.

Swap spreads in the US continue to trade on the wide side, as issuers and their underwriters attempt to hedge the risk of higher interest rates. The weak swap spread market is of concern for the corporate bond market. As swap spreads push wider, so to do corporate bond spreads. This in turn means that the absolute cost of borrowing is rising for companies. As capital gets more expensive economic activity should slow, and ease the concern over future rate hikes by the Fed. There should be no illusions, however, regarding the direction interest rates are going to move at the next FOMC meeting. Up.

The Japanese continue to appear serious about reforming their beleaguered banking system. Three large Japanese banking institutions, IBJ, Dai Ichi, and Fuji Bank are in discussions that would create a $US 1 trillion financial institution alliance. This reorganization could result in a 20% reduction in staff and the closure of a 150 branches. This rationalizes the banking system, but hurts any consumer lead recovery as more Japanese join the unemployment lines.

Economic data was mixed this week, as investors wait nervously for the Federal Reserve Board meeting next week. In Canada, the trade surplus increased to a record $CDA 2.8 billion from $CDA 2.3 billion the month before. In the US, CPI rose 0.3%, with the core rate up 0.2% month-over-month in July; housing starts rose 5.7% in July; industrial production rose 0.7%; capacity utilization rose to the highest level of the year at 80.7; trade deficit rose to a record $US 24.6 billion form $US 21.2 billion, the deficit with Japan rose to over $US 1 billion.

In the Canadian bond market, the 30 year long bond shed 9 basis points to close the week at 5.83%. In the US, the 30 year Treasury closed at 5.99%, better by 11 basis points. The benign CPI data, and a belief that the Federal Reserve Board may only raise interest rates one more time this year at the next FOMC meeting, allowed the market to hang on to gains made this week.

The North American equity markets rose this week, with a strong day Friday being the key to finishing in the black for the 'Big Board'. Commodity based industries did better this week lead by oil and gas, paper, forestry and gold. The financials performed well on the belief that the recent sell off has been overdone. The equity markets feel like they want to move higher, but need conformation from the bond markets before they do.

The TSE finished the week up 1.76 points, or 123.06 points, to close at 7129.22. The DJIA added 1.16% to close at 11,100.61, up 126.96 points. The S&P500 added 0.67%, while the Nasdaq added 0.40% on the week.

Next week brings the looming Federal Reserve Board Open Market Committee meeting to decide the near-term future for US interest rates. Look for the Federal Reserve Board Chairman, Alan Greenspan to remain his 'gradualist' self and raise rates 25 basis points. Good trading.

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