Weekly Wrap-Up September 13-17, 1999

The North American fixed income markets were down on the week. Continuing fears of further Federal Reserve Board rate hikes, and the possibility of a similar move by the Bank of Canada, has kept investors on edge. Supply in both Canada and US limited any upside moves when the market did have a positive tone. The equity markets traded down on the week, as inflation concerns and possible Fed rate hikes dominate investors' minds. The sector rotation which has dominated the market may be coming to an end, as investors are concerned that the rally in commodity prices may be peaking. Equity investment cash flows have been moving from the US to Japan.

The North American fixed income markets were down on the week. Continuing fears of further Federal Reserve Board rate hikes, and the possibility of a similar move by the Bank of Canada, has kept investors on edge. Supply in both Canada and US limited any upside moves when the market did have a positive tone.

Hurricane Floyd was a factor in the markets as investors felt that the damage caused by the storm would force insurance firms to sell securities in order to fund claim settlements. With the US east and north-east coast missing the majority of the storm's full force, the damage is not expected to be as devastating, resulting in lower claims. The storm did provide some nervous moments for Wall Street types. Due to the Floyd's rains washing Manhattan clean, many dealers closed early Thursday to allow employees to get home ahead of the storm.

This week saw the Yen put in a three year high versus the $US. The shift in capital flows have been out of North America and into Europe and Asia, particularly Asia. Earlier this year the $US/Yen was at 121, now its at 104. The new Euro started the year at 1.16 to the $US, now it is at 1.03. As capital flows out of the US and Europe and into Asia, currencies reflect the movement of these cash flows. Investors are buying Asian markets in an effort to capitalize on the regions recent recovery. The concern to Japanese exporters is that a stronger Yen means lower exports as goods become more expensive abroad. The Bank of Japan has been active in the foreign exchange market trying to decrease the value of the Yen. An official at Toyota indicated that the company would be more comfortable with the Yen at 115. For investors in Japan this will also be a concern due to the continuing corporate restructuring and layoffs, undermining any consumer driven recovery. For the region to pull itself out of the economic doldrums, exporters are going to have to do the majority of the work.

For all those gold bugs out there, the Bank of England is preparing for the second round of gold reserve auctions next week. The precious yellow metal may be cheap, cheap, cheap.

Economic data this week increased concerns that the Fed would raise interest rates in the US at its next meeting October, 5. In Canada, CPI rose at 0.3% month-over-month in August, with the core rate up 0.2%, on an annualized basis CPI has risen 2.1% year-over-year, with the core rate of inflation up 1.6%. In The US, CPI rose 0.3%, with the core rate up 0.1%; retail sales rose 1.2% in August, while July retail sales were revised higher to 1% from 0.7%; housing starts continued to rise, up 0.4% in August.

In Canada, continuing corporate and provincial supply has meant that the Canadian bond market has underperformed the US market over the past several weeks. The Government of Canada 30 year long bond added 5 basis points to close the week at 5.89%. In the US, investors are beginning to weigh Y2K liquidity concerns against the possibility of further Fed rate hikes. As a result, the US 30 year Treasury bond added only 2 basis points this week to close at 6.05%. The Canada/US 30 year bond spread has widened a further 3 basis points to -16, from a narrow of -42 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets traded down on the week, as inflation concerns and possible Fed rate hikes dominate investors minds. The sector rotation which has dominated the market may be coming to an end, as investors are concerned that the rally in commodity prices may be peaking. Equity investment cash flows have been moving from the US to Japan.

The TSE shed 101.04 points, or 1.41%, to close at 7062.33. Year-to-date the TSE is up 8.89%, but is till down 9.71% from its high of April 1998. The DJIA lost 2.04%, down 224.80 points, to close at 10,803.63. The Dow has posted a 17.67% gain on the year, down 4.61% from its recent high. The S&P500 shed 1.20% to close at 1335.42, while the Nasdaq lost a mere 0.60% to finish the week at 2869.62.

Next week is very thin on economic data, with the trade deficit/surplus being the prime numbers on the week. Look for the markets in North America to trade off the Yen and interest rates. Don't forget, the Bank of England is auctioning off gold reserves next week. Good trading.

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