Weekly Wrap-Up December 15-19, 1997

Closing Numbers

The North American bond markets were dominated by currency and quality issues this week. With the Federal Reserve Board's FOMC meeting decision to leave short-term US interest rates unchanged, indicating that the US economy is in a period of interest rate stability, low inflation and continuing growth. Bonds became the instrument of choice as the week closed out. Flight to quality cries came from investors searching for a haven from equity market volatility. The Asian flu continues to cause consternation among investors attempting to determine where value lies. At present, it appears to reside in the bond market. Even with the Canadian currency attempting to break 12 year lows against the US dollar, closing Friday at 1.4332, the Canadian bond market held in well. Economic numbers indicating that inflation is well contained, helped.

On the data front several releases this week in Canada pointed to a healthy economy, with little inflationary pressure. Canadian manufacturing shipments for October grew 1.5%; inventories rose 0.7%; new orders rose 2.1%; unfilled orders rose 2.1%; wage settlements rose 1.7%, year-over-year. Canadian trade balance decreased substantially to +$CDA 581 million; imports rose 2.7%; exports fell 0.6%; wholesale trade for October grew 1.8%. The big economic news in Canada was that consumer prices decreased 0.1%, down 0.3% ex food and energy. On an annualized basis, the consumer price index has declined below the bottom end of the Bank of Canada's target inflation zone of 1-3%, posting a 0.9% annualized increase.

With the $CAD getting so badly hurt in the international markets, the argument for raising interest rates further to defend the dollar is not a compelling one. A sagacious move would be to wait until the start of the New Year before taking any action, as trading volumes are thin at present and when the Holidays are over, a more reasonable value may be established for the Canadian dollar.

In the US, as already noted, the FOMC meeting came and went with little ceremony. Mr. Greenspan wisely left rates unchanged, as there is little in the way of compelling data indicating an increase in US inflation. As well, if the FED did raise rates, the turmoil in Asia would be exacerbated as investors move out of the region and into stronger $US denominated investments. Economic data out of the US saw housing starts for November grow 0.8%; real earnings rise 1.4%; the trade balance decrease to -9.69 billion; and CPI increase a modest 0.1%.

Many of the trading desks are reporting decreasing activity as traders and investors prepare for the Holiday season. Friday saw the bond traders in Toronto step out for their annual Christmas Turkey lunch, which reportedly saw few return to the desk for afternoon duty. By the close Friday, the Canadian 30 year bond was unchanged from the levels reported last week, finishing the week at 5.99%. The US 30 year Treasury bond managed to shed 2 basis points over a rough ride on the week, to close at 5.91%, the lowest close for 1997. The Canada/US 30 year spread widened 2 basis points to 8, reflecting the increased yield compensation investors require to account for the weakness in the Canadian dollar. Talk by the Federal government of spending the fiscal windfall may also be pushing the spread wider. Is there a fiscal windfall to spend in a country $CDA 600 billion in debt?

The North American equity markets continued to suffer from the Asian flu as investors continue to beat up company stock prices with any exposure to the Asian region. The announcement by Toshoku Ltd., one of Japan's largest food companies, that it is filing for bankruptcy undermined the global equity markets. Canadian markets continue to feel the effects of the flu, as an exporting nation any slow down in the countries utilizing raw materials to produce manufactured products will hurt the Canadian economy. Resource based firms fell through-out the week, as did the banking sector. With 23% of the TSE comprised of bank and financial stocks, the fear of increased interest rate hikes to defend the ailing Canadian dollar hurt this sector all week.

With the default of Toshoku, and the decreasing hope that the fiscal stimulus plan announced by Japan will due anything significant to the languishing Japanese economy, the Nikkei posted its second lowest close of 1997, at 15314.89. When the Nikkei closes this low, the stocks of Japanese companies held by financial companies in Japan as assets on the balance sheet begin to show the weakness of corporate financial structures. Any further decreases in the Nikkei could mean more bankruptcies in the already troubled Japanese financial sector. The turmoil overseas, combined with the expiry of options and futures contracts Friday, in what is known as 'triple witching', added to the volatility being experienced by the equity markets.

The TSE closed down 106.50 points, or 1.60%, at 6535.34. The DJIA also posted a loosing week with a close of 7756.29, down 82.01 points, or 1.05%. The Nasdaq and S&P 500 also experienced losses on the week.

Next week is a holiday shortened session, with the most important economic data being released Tuesday, including the final revision of US GDP for Q3, and durable goods orders. The markets will be closed Christmas Day in the US, and both Christmas Day and Boxing Day in Canada. Don't expect a great volume of trading to be done next week, as skeleton staffs, and junior traders will be covering most of the trading desks. Good trading.

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