Weekly Wrap-Up January 11-15, 1999

International events dominated the North American markets this week. The announcement out of Brazil that the head of the central bank had resigned sent waves of panic through the markets. The old flight to quality trade re-emerged, as investors left the lure of capital gains in equities to seek the safe haven of US Treasuries.

The North American bond markets were the darlings of the investment world this week as the flight-to-quality trade returned. Bonds were well bid as investors became increasingly nervous over the condition of the Brazilian economy, and the ramifications for the rest of Latin and Central America.

The chief of Brazil's central bank, Gustavo Franco, resigned this week in order to assume the role of aid to the President. Mr. Franco was a strong supporter of the real's peg to the $US, as well as currency target bands managed through interest rates. This also coincided with his steadfast support for the IMF imposed austerity targets aimed at bolstering the Brazilian economy. The uncertainty with respect to Brazil's economic future, and subsequent support from the IMF, caused a flight-to-quality trade in the bond markets as implications to the rest of Latin American and Mexican economies are considered. The IMF has turned its focus to Argentina and Mexico in an effort to mitigate the domino effect. The worst from Latin America is yet to come as the region slips further into recession.

The $US had weakened substantially to the Yen over the past six weeks. This week the Bank of Japan stepped in to stem the strengthening Yen. The intervention in the currency markets by the Bank of Japan sent the $US/Yen cross up four big figures, from the 108 area to over 112. This was done to aid the exporters in Japan, who have been one of the only bright spot in a sinking economy. As the Yen strengthened versus the $US, Japanese exports become relatively more expensive for American consumers to purchase, thereby cutting demand and weakening Japanese producers further. A weaker Japanese Yen benefits the regions economy. Given the report out of Malaysia this week that industrial production had dropped 11.50% year-over-year, the region needs all the stimulus it can get, and a weaker Yen will certainly help.

China announced that another of its large investment and trust companies had to be liquidated this week. The Guangdong International Trust and Investment Co. had its assets liquidated by the Chinese authorities. This was the second largest company of its type in China, and indicates that not all is well with China's financial system. But with the quality of the economic data coming out of the country, it is difficult to tell what is really going on there.

In an attempt to stabilize the markets concerns over the economic condition of the US, Federal Reserve Board Chairman Alan Greenspan addressed a conference of Central Bankers in Japan this week. In his address, Mr. Greenspan stated that the "slowing that was foreseen for next year would be relatively moderate in nature." This statement did little to reassure the equity markets over the week, to the benefit of the bond market.

The fixed income market benefitted primarily from the flight-to-quality trade generated as a result of investor uncertainty surrounding Latin and Central America. A host of corporate and provincial supply in Canada held the Canadian market back. The Government of Canada 30 year bond shed 7 basis points over the week closing at 5.29%. The US Treasury 30 year long bond finished the week 16 basis points lower at 5.12%. The Canada/US 30 year bond spread widened 9 basis points to 17 basis points on a weakening $CAD. (A basis point is 1/100th of a percent.)

The North American equity markets retreated this week, as nervous investors sought the relative security of the fixed income markets. After the equity markets had a strong first week in 1999, the New Year's celebration wore off as investors took profits and saw the storm clouds of earnings concerns brewing on the Latin and Central American horizon. Firms with exposure to the region were particularly hard hit over the week, particularly the financial sector. However, by week's end international institutional investors saw the decline in both the Brazilian real and equity markets as being an irresistible dip to buy on and raced back into the market. The trouble in the region is not over, however the leveraged hedge funds may not be as strong an influence as they were in the turbulent August to October period of 1998.

A host of merger announcements last week could not support nervous markets. British American Tobacco announced the take-over of Rothmans for $US 21.33 billion; Lucent Technologies purchased Ascend Communications for $US 16 billion, making the combined entity a true competitor of Cisco Systems; Vodaphone won the race for AirTouch with a bid of $US 56 billion; Tembec announced the purchase of Crestbrook. Waiting in the wings is a possible merger of DaimlerChrysler and Nissan's heavy truck unit, and ongoing talks between Volvo and Fiat.

Many dealers in Canada reported that the winter storm which hit Toronto, Thursday and Friday, kept many investors away from the office, and only skeleton staffs working. Early closes both days in Canada and Friday in the US, ahead of the Martin Luther King Jr. Holiday Monday, kept volumes low and markets thin.

The Toronto Stock Exchange posted a 1.59% loss, down 109.51 points, to close the week at 6759.42. The Dow Jones Industrial Average closed the week off 3.14%, declining 302.77, to close at 9340.55. The S&P500 also posted a 2.50% retreat on the week. Only the Nasdaq managed to post a new record high on Monday and post a positive week, up 0.16% overall. For the tech laden Nasdaq, the momentum based day traders rule the roost, and internet chat rooms have more power than fundamentals.

Next week brings a holiday shortened session in the US as Americans take Monday to celebrate Martin Luther King Jr., and a return to more normal markets in Canada as the red suspenders of Bay Street make their way in from snow bound igloos. Good trading.

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