Weekly Wrap-Up February 8-12, 1999

The Bond markets in North America suffered from lingering international concerns and the weight of domestic supply. The Equity markets could not hold onto any gains on the week, even with the outcome of the US impeachment hearings. The markets felt heavy all week, and traded accordingly.

The North American bond markets weighed heavy this week, with the volume of Government supply. The US Treasury started its quarterly refunding operations, while the Bank of Canada issued ten year bonds. Other factors contributing to the sell-off in bonds were the comments made by Federal Reserve Board Chairman Alan Greenspan before the House and Senate committee this week. Ongoing economic concerns in Brazil, Russia, Japan, and China did not help the tone of the market. Concerns over the lack-lustre growth in Europe saw action out of Britain, and rumours out of Germany. Even the 'No' vote on the impeachment of 'Slick Willie' could not help the markets this week.

In his testimony before the House and Senate this week, Federal Reserve Board Chairman Alan Greenspan put the death nail in any hope for an interest rate decrease in the near-term. The Fed Chairman called the US economy "the envy of the world". This is hardly an indication that the Fed is concerned about a slowdown in US domestic growth.

Brazil continues to raise eyebrows as a result of the continuing political rhetoric between the Federal government and individual States. The sabre rattling focuses on the countries debt obligations and the austerity measures required to get Brazil's fiscal affairs in order. Adding to the concern is the IMF's desire to see an increase in measures aimed at decreasing the country's debt burden. The austerity measures must be in place before the IMF releases any more of the $US 41.5 billion stabilization package. The saga continues.

Russia continues to experience liquidity problems as more of the country's emerging industries are indicating that they may default on foreign debt obligations. While most of the foreign currency denominated debt of Russia, and its companies, is trading at $0.10 on the dollar, the issue is confidence in the viability of the Russian financial system, and the ability of companies to raise capital in the international markets. Credibility goes a long way with international investors.

China is experiencing some of the early warning signals of a possible decline in international investor participation in it's emerging capital market. Foreign owned banks are increasing the credit standards required to secure funding. This reduces liquidity at a time when many of the state run enterprises are attempting to become more capitalist in nature. Many foreign banks are withdrawing from the Chinese credit market, calling demand loans. As international liquidity becomes scarce, and the domestic Chinese borrowing market is reported to be dry, continued growth in economic activity may be in danger.

The Japanese economy continues to be stuck in neutral and slowly rolling downhill, even in the light of the stimulus packages announced by the Government. This week in another attempt to kick-start the economy the Bank of Japan reduced short-term interest rates to 0.15% from 0.25%. They Bank of Japan is practically giving money away, and nobody cares. Credit standards for domestic corporate borrowing have been tightened, and the consumer continues to remain on the sidelines. Talk by government officials to reverse the recent trend of Yen strengthening versus the $US, indicated that in the Japanese intend to export their way out of recession as a weaker Yen helps in the cause.

Britain continues to acknowledge the concerns it has with its own economy. After cutting short-term interest rates two weeks ago by 50 basis points, the Bank of England announced this week that it has revised its estimate of British GDP growth lower. The forecast rate of growth for the British economy for the next 5-6 quarters is 0.5 - 1.0%. This is lower than previously thought. Europe is slowing as well as indicated by the largest economic engine in the EU, Germany. Last months employment figures indicated that the unemployment rate in Germany rose from 10.9% to 11.5%. Look for a stimulus package to be announced out of Germany shortly.

Economic data was sparse this week in both Canada and the US. In Canada, housing starts declined 1.4% in January on a month-over-month basis. In the US retail sales was released, and was generally considered a non-event by the markets.

The bond markets were hit hard this week. The US Treasury issued 5 year, 10 year and 30 year bonds. With US 5 year and 10 year rates below 5%, there was not a compelling argument to load up on product. The US 30 year auction was sloppy, in a market that was demonstrating poor technical conditions. As a result, dealers ended up with too many bonds on their books and wanted nothing to do with going home long, over the Presidents' Day long weekend. Sell!!! And they did.

In Canada, supply also weighed heavy on the market, although not nearly as heavy as in the US. The Bank of Canada issued $CDA 2.3 billion 10 year bonds. The bid was strong with a 2.71 times bid coverage ratio. Corporate and Provincial supply continues to come to the market, although not as much as in the past couple of weeks. Most of the Provinces are close to being done their financing, and are heading into their Provincial budget black-out periods.

In Canada, the 30 year long bond posted a 4 basis point increase in yield to close the week at 5.39%. In the US, the supply, coupled with poor technicals, broke the market. The US Treasury 30 year long bond closed the week 15 basis points higher at 5.49%. The Canada/US long spread is now at -10 basis points. Look for commentators to rationalize the negative spread via an improving current account position in Canada relative to the US. (A basis point is 1/100th of a percent.)

The North American equity markets continued the sell-off that started two weeks ago. The comments out of Mr. Greenspan indicating that the US economy was "the envy of the world" has investors wondering if the Fed will cut interest rates further, spurring increased earnings growth potential in the equity markets. Valuations established earlier in the year have had to be reconsidered. Many believe that the market has got a head of itself, and needs to retrace some of its gains.

One of those who feel the US equity markets are poised for a correction is Prudential Securities strategist Ralph Alampora, who indicated that the equity markets could experience a 10% decline in values from current levels. This was not supportive for the market.

Merger and acquisition activity slowed this week. Lycos and USA Networks announced an asset swap deal early in the week. Later in the week Federated Department Stores announced the purchase of Fingerhut - a mail order and e-commerce firm - for $US 1.7 billion. Federated had been rumoured to be preparing a bid for approximately 20-25 of Eaton's department stores in Canada. With the Fingerhut deal, this may now be on the back burner. It was also announced that the potential deal between Newcourt Credit Canada and Deutsche Bank had fallen apart. By the rumour, sell the news.

The TSE finished the week down 3.01%, or 199.68 points to close at 6433.69. Year-to-date the TSE is off 0.81%, while it is 17.75% below its high set in April of 1998. The DJIA dropped a modest 0.32% on the week, or 29.35 points, to close at 9274.89. The Dow is up 1.02% on the year, down 3.82% from its recent high. The S&P500 dropped 0.75% on the week, leaving it virtually unchanged on the year and down 3.87% from the recent high. The tech heavy Nasdaq was down 2.81% on the week, leaving it down 7.50% from the high, yet up 5.89% on the year.

Next week brings a President's Day holiday shortened week in the bond markets. With the only really relevant economic data to be released focus on CPI late in the week, look for technicals and developing global situations to effect the markets. Good trading.

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