Weekly Wrap-Up October 11-15, 1999

The North American bond markets picked-up where they left off last week and went south. The Thanksgiving turkey binge in Canada and Columbus Day in the US provided a holiday shortened trading session. The only saving grace for bonds on the week was a flight-to-quality trade at weeks' end in the face of a collapse in the equity markets. Comments by Federal Reserve Board Chairman Alan Greenspan, along with strong economic data are beginning to knock down consumer confidence levels. The equity markets, for the most part, spent the entire week in the dog house. It was not pretty for equity holders prior to Thursday's comments by Fed Chairman Alan Greenspan, and was worse after. Equity investors had been looking for a reason to move the market forward through third quarter earnings. However, earnings reports released so far have not surprised the markets to the up side, but rather have just met or missed the markets expectations to the downside. The end result has been that the equity markets have taken a significant beating on the week.

The North American bond markets picked-up where they left off last week and went south. The Thanksgiving turkey binge in Canada and Columbus Day in the US provided a holiday shortened trading session. The only saving grace for bonds on the week was a flight-to-quality trade at weeks' end in the face of a collapse in the equity markets. Comments by Federal Reserve Board Chairman Alan Greenspan, along with strong economic data are beginning to knock down consumer confidence levels.

Federal Reserve Board Chairman Alan Greenspan made a couple of speeches this week. The first, on the Columbus Day holiday, had little information which lexicographers of 'Fed Speak' could use to decipher the Chairman's intentions with respect to monetary policy. The second speech, Thursday night, left little to the imagination. The Fed Chairman indicated that investors may not fully comprehend the risks associated with owning equity. Underestimating this risk will eventually result in the loss of consumer confidence should there be a significant market 'correction'. Mr. Greenspan also indicated that banks in the US should increase their reserve holdings in order to weather any future market panic. Can you say bubble.

The Bank of Japan made good on its plan to add liquidity to the market in an effort to stabilize the level of the Yen. The Japanese central bank indicated that it would be participating in the money market through the purchase of Bills, and through the bond market through the use of repo agreements. Both of these tools add cash to the financial system and remove bonds, thereby reducing interest rates and demand for the Yen. Unfortunately, there was little actual impact in the currency markets as the Yen appreciated against the $US form 107.88 to 105.73, or 2% on the week.

The Japanese continue to attempt to reform there banking sector, which has been of significant concern to the long-term recovery of the Japanese economy. This week Sumitomo Bank and Sakura Bank announced that they would join forces. This merger will create the world's second largest bank. The size will be required in order to try to make sense of over a decade of bad loans on the both banks' books.

Economic data this week was thin, but important. In Canada, existing home sales rose 4.8%, on a year-over-year basis in September. In the US, retail sales rose 0.1%, up 0.6% ex-automobiles; jobless claims dropped 28,000 as the effects of Hurricane Floyd dissipated; import prices rose 0.7% month-over-month, up 0.1% ex-oil, and rose 3.4% year-over-year, or -0.5% ex-oil; PPI showed the largest increase in nine years, primarily due to oil and tobacco.

The Canadian bond market underperformed the US market this week as weak technicals combined with Government of Canada supply at the long end of the yield curve to knock the market back. Only a flight-to-quality rally at the end of the week inspired by the equity markets' melt-down helped bonds.

The Government of Canada issued $CDA 1.9 billion 30 year bonds this week. The market in that part of the yield curve was cheap, and got cheaper as the auction was sloppy. By the end of the week the Government of Canada 30 year bond was yielding 6.20%. In the US, the Treasury 30 year long bond was knocked back, to finish the week off the recent lows, yielding 6.26%. The Canada/US long bond spread continues to move towards neutral, at -6 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets, for the most part, spent the entire week in the dog house. It was not pretty for equity holders prior to Thursday's comments by Fed Chairman Alan Greenspan, and was worse after. Equity investors had been looking for a reason to move the market forward through third quarter earnings. However, earnings reports released so far have not surprised the markets to the up side, but rather have just met or missed the markets expectations to the downside. The end result has been that the equity markets have taken a significant beating on the week.

Third quarter earnings, which many investors and analysts had expected to be strong, have disappointed the market so far. This week Intel released its earnings, missing analysts expectations by 3.5%. This resulted in a significant sell-off of most of the tech stocks. Poor earnings out of Intel creates uncertainty about the rest of the tech sector. Consumer demand in the chip market is being questioned.

The comments out of Federal Reserve Board Chairman Alan Greenspan regarding investors understanding of the risks they are taking in the equity markets did little to comfort an already skittish market. Questions are being asked as to whether we are setting up for another Black Monday.

Next week brings more inflation data for the markets to digest. The DJIA is down 11.5% from its high in August, greater than the 10% market technicians classify as a 'correction'. This may lend support. The bond market is currently just above the bottom end of its recently established bearish range. Technicals favour a 'pop' here. However, it is most likely the type of sell-the-rally type of 'pop' rather the buy-the-dip type. Good trading.

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