Weekly Wrap-Up December 8-12, 1997

Closing Numbers

The North American bond markets were dominated by the Asian Flu and currency concerns. In the fixed income markets, last week's negative reaction to the US non-farm payrolls number was compounded initially by the continuing instability of the Asian financial system. The Japanese Finance Ministry announced that it would use its holdings of equities as collateral for a $US 77billion aid plan, resulting in Yen 10 trillion financial support for the ailing financial system. Canadian and US traders attempted to assess the impact such a program would have on demand for North American fixed income securities. A weakening Canadian dollar added to the turmoil in the Canadian markets, as the yield on the long bond moved out through the yield on US treasuries for the first time in months. As the week progressed and equity turmoil in both Asia and North America worked its way through the system, benign inflation numbers gave a bid to the fixed income markets, as the flight to quality resurfaced.

The Canadian market was given an additional boost by Bank of Canada intervention in the markets to defend the $CDA with a 50 basis point increase in short-term interest rates. The Banks usually conservative and gradual 25 basis point move was supplanted with a strong signal to the market that the dollar would be defended, and inflation would be kept well in check. Canadian short-term rates have moved to 4.50% from 4%, with the Canadian Prime rate now 6%.

On the economic data front several releases came out in Canada indicating a continuation of the strong economic growth, low inflation environment that has been the norm for so long. Canadian capacity utilization grew 1.2 to 86.2% for Q3; housing starts for November dropped 0.5%; new vehicle sales rose 1.9% in October; the new housing price index dropped 0.1% for October; and Canadian GDP Q3 grew 0.1% to an annualized rate of 4.1%, with the implicit price index down 0.1%. The news associated with the GDP figures was that consumer spending continued to increase, while real income growth grew at a much smaller pace, indicating that the savings rate continues to decrease, and consumer debt burdens continue to grow.

In the US few important numbers were present early in the week, however, late in the week several numbers came out that had a definable market impact. Wholesale trade figures saw inventories in October unchanged; the US current account deficit grew 4.31billion to 42.16 billion in Q3, US retail sales for November were up a muted 0.2%; and US PPI was down 0.2%, down 0.1% ex-food and energy costs. Clearly, the US economy continues to see good growth, with little sign of inflation. With the Fed FOMC meeting Tuesday 16, December this was good news to traders, who took this as an indication that Mr. Greenspan will leave rates unchanged.

On the week the bond markets significantly outperformed equitites. The Canadian 30 year bond moved to a high yield of 6.11% before rallying to close the week at 5.99%. The US 30 year Treasury bond moved out to a high yield of 6.13% before stagging a strong week ending rally to close at a four and a half year low of 5.93%. The Canada/US 30 year yield spread moved back into positive territory this week as Canada underperformed the US due to currency concerns. The spread ended the week at +6 basis points after getting to a record low of -23 basis points in October.

The North American equity markets were not immune to the Asian Flu. In fact, the concerns over future earnings that had been voiced by market commentators, analysts, and traders appeared to find a foothold in reality with the announcement by Oracle that earnings would not meet Street expectations due to the influence of decreased earnings form the Asian component of its product line. This sent the equity markets south in a hurry. Any company with large exposure to the economic well being of the Asian nations was hurt this week. In Toronto, firms like NorTel and Newbridge Networks were particularly hard hit. In New York, the high tech sector continues to be out of favour, as analysts attempt to determine the full impact of a slow down in Asian economies, an increase in the value of the $US, and the bottom line impact to North American producers, particularly of products like semi-conductors.

Toronto did not get any help from the gold markets this week, as bullion declined $US 5.60, to an 18 year low of $US 282.80. This move underscores the weak nature of the precious metal, and until hedging strategies begin to unwind in early 1998, there is little reason to expect gold to fare any better over the near-term. Continuing concern over the supply of bullion coming out of central banks moving off of the gold standard is also undermining the commodity. Some of gold's weakness was mitigated by the bank stocks this week, as investors determined that the non-interest income banks derive from their brokerage and insurance business is growing faster than interest related income.

The equity markets were all losers this week. The TSE managed to outperform in an underperforming market. The TSE lost 82.48 points, or 1.23%, to close the week at 6641.89. The DJIA closed the week off 3.81%, or 310.83 points, at 7838.30. While the goat horns go to the tech heavy Nasdaq which shed 5.81% of its value, or 94.76 points, to close the week at 1536.58.

Next week brings the ever important Fed FOMC meeting Tuesday. Look for no action by Mr. Greenspan, as an increase in US interest rates would make US investments more attractive to foreign investors, thereby increasing the value of $US, and fueling the financial problems plaguing the Asian economies at present. Other important economic data out next week includes, industrial production, CPI, real earnings, housing starts, and the trade gap. Markets appear to continue to suffer from the Asian Flu, look for bonds to outperform equities over the next week if Asia sneezes. Good trading.

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