Weekly Wrap-Up August 4-8, 1997

Closing Numbers

The North American bond markets started the week weak and finished off just plain ugly. With the Canadian markets closed Monday for the civic holiday, the US continued the sell-off begun a week ago Friday. A benign construction spending release of -1.1% did little to help hold the markets in. With the US quarterly refunding and a Canadian 10 year auction this week, supply weighed heavy on an already nervous market. The US Treasury came to market with $US 16Bil 3 years, $US 12Bil 10 years, and $US 10Bil 30 year treasury bonds this week. The Bank of Canada came to market with $CDA 2.3Bil 6%/2008. All auctions were well received by the street, but for the most part stayed on the books of the dealers, as clients remained reluctant to take on new supply in a nervous and technically overbought market. With so much new supply out there and the market heavy, the distribution of the issues would take a significant increase in yields for the client side of the street to wade back in and do some buying. The action into the end of the week allowed some distribution to occur. The weakness in the $US versus the Yen and Deutschemark at the weeks end also contributed to the sell-off.

The only significant number out for the Canadian market this week came Friday, in the guise of the most recent employment data. The Canadian unemployment rate fell from 9.1% to 9.0%, as 15K new jobs were created. The employment figure of 9.0% was as expected, however the jobs created were below street expectations. As a result, the Canadian bond market outperformed the US market through-out the sell-off.

Over the course of the week's activity both the Canadian and US 30 year bonds sold-off 18 basis points. The Canadian 30 year closed the week at 6.59%, while the US 30 year treasury backed up to a yield of 6.64%. The Canada/US 30 year bond spread has moved back to its low of -5 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets continued to focus on fundamentals, until the end of the week when they traced out the same path as the bond markets. Early in the week, the TSE, the DJIA, the S&P 500, and the Nasdaq combined to set 8 record closes. Cyclicals and financial services stocks performed well until the bond markets turned sour. With an increase in interest rates, those stocks sensitive to such changes were adversely affected. Banks, financial service firms, utilities all suffered as a result of the bond correction.

The sell-off in the equity markets has been referred to as a minor move in an otherwise strong market. The TSE was the strong horse of the week, benefitting from good fundamentals early in the week, and a rebound in gold shares as the bond markets dove at the end of the week. On the week the Toronto index managed to hang onto a 21.16 point gain, to close the week at 6872.30. The Dow shed 162.82 points on the week, closing the week below 8100, at 8031.22. Even the tech heavy Nasdaq could not hold onto the good news that Microsoft and Apple Computers will work together as opposed to against one another, closing only 4.19 points to the good, at 1598.52.

The sell-off in the markets this week indicated that the levels that have been attained so far this year may have arrived ahead of were the market should be. For the past couple of weeks the technical indicators have be hinting at the need for a correction in values, particularly in the bond markets. With part of the revaluation out of the way some buyers have stepped into the breach in an attempt to do a little bottom feeding. Next week is a heavy session for economic data, with US productivity, PPI, retail sales, CPI, industrial production and manufacturing and trade inventories. Given the volatility exhibited by the markets this past week, next week could be just as wild a ride if the fundamentals start to line up with the technicals. Good trading.

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