Weekly Wrap-Up December 14-18, 1998

The financial markets this week were dominated by major international activities, both of a military and political nature. However, all the uncertainty created by these potentially destabilizing events did little to the financial markets. Both the fixed income and the equity markets finished stronger on the week. Assets which are traditionally stores of value, gold, or hurt by mid-east bombings, oil, closed lower on the week.

The North American fixed income markets experienced a lack-lustre trading week, with thin 'holiday' volumes characterizing trading. The news early in the week that the US and Britain were taking unilateral action directed at Sadam Hussein did little to provide the 'flight-to-quality' trade usually witnessed in times of uncertainty. Instead an orderly market, driven by economic fundamentals and technical indicators, carried the day.

The US and Britain took unilateral punitive military action against Sadam Hussein over Iraq's failure to comply with the UN arms inspection team. After several diplomatic attempts at cooperation failed, most recently one spear-headed by UN Secretary General Kofi Annan, the two allies felt the only option left to them was force. Over the week more bombs and cruise missiles fell on Iraq than did during the entire Gulf War, according to officials.

Republican dominated House of Representative's move to impeach the President of the US was temporarily suspended at the outset of hostilities. However, as it appeared that the military action was not meeting with any resistance, and US troops were not significantly threatened, the Republicans in the House turned up the heat. Saturday the House of Representatives voted to impeach the President. This entails sending the two charges - one of perjury, one of misuse of power - before a full trial of the Senate. President Clinton enjoys significant support of the American people and there is little public sentiment for the removal of their leader. The market may not be effected even if the President is impeached because Federal Reserve Board chairman Alan Greenspan has much more market credibility than does President Clinton. If Mr. Greenspan were to leave office, the markets would show significantly more concern.

In Canada, the Finance Minister, Paul Martin, said NO to the proposed mergers in the banking sector. Siting a report prepared by the Competition Bureau, Mr. Martin indicated that there would be too great a concentration of market power in the hands of too few institutions. While the move was not unexpected, the reaction to the decision by many analysts and supporters of the mergers was that the government was looking at the past and not the future of the industry. Finance Minister Martin indicated that the mergers may be re-visited in a couple of years, after the government has had an opportunity to amend the Banking Act to allow greater foreign competition.

Nippon Credit Bank in Japan was nationalized by the government, adding it to Long Term Credit Bank as financial institutions nationalized in an attempt at cleaning up the Japanese financial sector. Adding to the depressed tone of the Japanese market was a business sentiment survey released that indicated the lowest levels of business confidence in the manufacturing and non-manufacturing sectors since the survey had been introduced.

In economically troubled areas there were a couple of tell-tale events. In Russia, where the government is unable to pay workers or pensioners, the government voted to print an additional $US 1.2 billion in rubles. This will augment the inflationary pressures already being experienced in a country whose economic health is weak and failing. In Brazil, where last week an austere budget was passed in an effort to secure the IMF financial assistance promised earlier this fall, the government voted itself, and senior civil servants, up to a 59% pay increase. This is unlikely to sit well with a populace asked to tighten its belt loop to protect a fragile economy.

On the economic front, data released in both Canada and the US indicate continued economic strength with no signs of inflation. This cuts the odds on another Federal Reserve Board reduction in interest rates at the December 22 FOMC meeting. In the US, CPI was up 0.2%, with the core rate up 0.2% for November; business inventories rose 0.3% in October; housing starts fell 2.7% in November, with building permits also showing a decline; industrial production dropped 0.3% in November; capacity utilization declined 0.6 to 80.6 in November; new jobless claims for the week ending December 12, fell 31,000 to 296,000; international trade deficit declined unexpectedly $US 200 million to $US 14.6 billion for the month of October. In Canada, manufacturing shipments rose 2.1% in October; inventories rose 0.1%; unfilled orders rose 2.6%; new orders rose 2.3%; international trade balance rose to $CDA 1.9 billion for the month of October as imports rose at a slower rate than exports.; composite index rose 0.2% in November; wage settlements rose 1.0% in October; CPI for November was unchanged, with core CPI down 0.2%, on a year-over-year basis CPI rose 1.2%, with the rate +1.5% ex food and energy; wholesale sales rose 3.1% in October; inventories grew 0.5%.

With the economic data released this week there is little reason to expect the Federal Reserve Board Chairman Alan Greenspan to announce a cut in interest rates in the US at the next FOMC meeting December 22. This being the case, the Bank of Canada Governor Gordon Thiessen is unlikely to make a unilateral move to reduce rates in Canada. The central banks in North America are going to have to wait until the New Year to see if the economy is slowing enough to require another infusion of liquidity through lower administered interest rates.

The bond market in Canada and the US managed to gain a little ground in what many trading desks characterized as 'holiday' quiet trading. In Canada, the Government of Canada 30 year log bond shed 3 basis points to close the week at 5.18%. In the US, the market managed to shave 1 basis point off the yield on the US Treasury 30 year bond, to close it at 5.01%. The Canada/US long bond spread narrowed to 17 basis points, 2 basis points tighter than last weeks close. (A basis point is 1/100th of a percent.)

The North American equity markets were pulled back and forth over the week by a mix of factors. The uncertainty created by the impeachment hearings and the bombing of Iraq had a muted influence, while the 'NO' on bank mergers and corporate earnings expectations management really drove the market. Hype in the technology markets continued to push the Nasdaq.

In Canada the TSE 300 closed higher on the week influenced by the markets south of the border. The financial sector was hurt by the announcement by Finance Minister Paul Martin that the Federal government would not allow the proposed bank mergers to proceed. Weaker commodity prices also held the Canadian market back. What did spur the market on was earnings announcements in the US. GE announced it was optimistic about next year's earnings. As well, Chase Manhattan and Adobe announced that their respective earnings would beat analyst expectations. An announcement by 3M that the earnings to be reported would be weaker and 1999 would be tough provided a modest drag on the market. In other news, Citigroup announced that it would lay-off 10,400 employees in an attempt to rationalize the merged entity's operations.

The TSE closed up 94.56 point, or 1.51%, at 6353.32. The DJIA added 81.87 points to close the week at 8903.63, better by 0.93%. The S&P500 added 1.85%, while the Nasdaq continues it's technology driven momentum move higher. The Nasdaq closed the week at a record high 2086.14, better by 2.80%. The trend for the Nasdaq continues, and you should not stand in front of a moving train. Just a hint - cashflow is King.

Next week brings a Christmas Holiday shortened week, with early closes highly recommended by all traders for Thursday afternoon. The only significant event this week is the FOMC meeting December 22. Do not expect any Christmas presents from Fed Chairman Alan Greenspan, as the Fed is widely expected to leave rates unchanged. Thin markets, with some more of the silly season tax driven trading, can be expected for the week. Most investors have already positioned their portfolios for the New Year. Merry Christmas and a Happy Chanukah!!! Good trading.

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