Weekly Wrap-Up September 27 - October 1, 1999

The North American bond market was ravaged this week as concerns over the Federal Reserve Board's upcoming meeting, strong economic data and very weak technical conditions combined to provide selling interest from investors. A small quarter-end rally mitigated the damage as indexers tried to put cash to work in an effort to do a little window dressing, although not nearly to the same degree as equity managers. The equity markets were saved this week by quarter end. Portfolio managers sold losers and added the winners of this past quarter to their portfolios in an effort to provide some window dressing for investors. The markets' changes on the week do not fully reflect the volatility which the market experienced over the week.

The North American bond market was ravaged this week as concerns over the Federal Reserve Board's upcoming meeting, strong economic data and very weak technical conditions combined to provide selling interest from investors. A small quarter-end rally mitigated the damage as indexers tried to put cash to work in an effort to do a little window dressing, although not nearly to the same degree as equity managers.

Gold had a significant rally this week. The shiny gold metal moved ahead 13.41% this week. The $US 35.90 rally was sparked by comments out of European central bankers indicating that the gold sales announced last year would come at a much slower pace than originally anticipated. As a result, gold closed above $US 300 for the first time in recent memory, finishing the week at $US 303.70.

In an attempt to put a cap on the Yen's increasing strength versus the $US, Bank of Japan governor Hayami announced this week that he was prepared to inject "ample liquidity" to ease any continuing upward pressure on the Yen.

Strong economic data dominated the numbers on both sides of the border this week. In Canada, industrial production rose 0.7% in July for an annualized rate of 6.9%; GDP rose 0.4% month-over-month in July, for an annualized rate of 4.6%. In the US, durable goods orders rose 0.9%, falling 0.2% ex-transportation; new home sales rose 2.8% in August; personal income grew 0.5%, personal spending rose 0.9%, the savings rate fell to -1.5% from -1.3%; Chicago PMI fell to 53.8 from 56.1, but prices paid rose to 71 from 63.8; NAPM rose to 57.8 from 54.2 and prices paid rose to 67.6 from 59.8. These numbers may be of concern to the Fed if there is further evidence of price pressures at the consumer level.

The bond markets did not do well this week. Government and corporate supply weighed heavy on an already weak market. In Canada, along with a number of corporate and provincial deals, the Federal Government issued $CDA 2.8 billion 5 year bonds. South of the border, the US Treasury issued $US 15 billion 2 year notes, and the market had to digest approximately $US 7.5 billion in corporate deals.

The market is weak from a technical analysis point of view. Charts and momentum are indicating that there will be higher yields in Canada and the US over the near-term. Combine this with a thin market ahead of the FOMC meeting, supply, Y2K concerns, a strong Yen and strong economic data and there is little reason to be long the market.

In Canada, the Government of Canada 30 year long bond added 15 basis points this week to close at 5.98%. In the US, the Treasury 30 year long bond added 17 basis points to close with a yield of 6.14%. Look for 6.20% in Canada and 6.25% in the US over the near-term, unless there is a significant shock to the economic environment and we see a flight-to-quality trade a la September 1998.

The North American equity markets were saved this week by quarter end. Portfolio managers sold losers and added the winners of this past quarter to their portfolios in an effort to provide some window dressing for investors. The markets' changes on the week do not fully reflect the volatility which the market experienced over the week.

The Canadian markets significantly outperformed the US markets this week due to the rally in gold prices. The TSE added 167.96 points, or 2.48% to close at 6931.34. The US markets did not fare as well. In New York, the DJIA was down a marginal 6.33 points, or 0.06%, to close the week at 10,273.00. Both the S&P500 and the Nasdaq were close to unchanged on the week as well.

While the Canadian market benefitted from the strengthening $CDA, stronger gold prices and firm oil & gas prices, the US was on tenderhooks ahead of the FOMC meeting next week. Limiting any upside move in the US was concerns about future earnings, as several companies - most notably Revelon and SCI, announced warnings. As well, Wall Street analysts have reassessed many top performing stocks, and have lowered their outlooks from 'outperform' to 'market perform'. That does little for investors confidence.

Next week brings the Federal Reserve Board's FOMC meeting, as well as more supply in the corporate markets. Look for an early close in the bond markets next Friday, as traders and brokers close up early for the long weekend - Thanksgiving in Canada and Columbus Day in the US. Bond markets are weak and equity markets are attempting to establish a new range. Good trading.

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