Weekly Wrap-Up January 18-22, 1999

Economic developments in Latin America continue to be a concern to investors. Developments in Brazil pushed bond prices higher and equity prices lower. Comments out of Federal Reserve Board Chairman Alan Greenspan confirmed that the short-term interest rates are not going lower in the near term, and that the Latin American situation may provide a drag on US economic growth. Equity investors may be pricing in too rosy an economic forecast for future earnings.

The North American bond markets ended the week stronger as fears of Latin American economic decline took hold. Comments made by the central bankers added to the belief that interest rates are not poised to be lowered in the near-term. While the shine of the equity market has faded somewhat, and investors moved capital back into the bond markets.

Concern continues to brew over the state of the Latin and Central American economies. After Brazil had allowed its currency, the real, to be devalued last week, officials moved to allow a free float of the currency. This saw the real lose approximately 30% of its value to the $US. It also drove the Brazilian central bank to intervene in the currency markets in an attempt to develop an orderly market. The intervention, however, only provided temporary support to the real. As a result of the devaluation, concerns are growing that commodity prices will remain depressed as Brazil's terms of trade improve with the US and export more goods for hard dollars. The region's economic worries are a long way from being solved, and there are rumours out of China of a devaluation of the yuan. If that occurs the whole Asian contagion downward spiral could happen all over again.

The Argentina has witnessed the devaluation of the real, and is considering the affects to its one-to-one peg of the peso to the $US. A determined policy to maintain the value of the peso at par may end. Government officials are considering a move to replace to peso with the $US. An interesting move, but one that would require some serious discussions with the US authorities. It also begs the question - How much longer until the Americas approach a common currency as the Europeans have?

According to comments made this week by Bank of Canada Governor Gordon Thiessen a common currency zone in the Americas is a long way off. Mr. Thiessen sees no reason for such a union to occur, especially with the structure of the various economies being so diverse.

In comments made by the Federal Reserve Board Chairman Alan Greenspan this week before the House Ways and Means Committee there was little talk of a shared Americas currency. Instead Mr. Greenspan focused his attention on the current economic condition of the US, and possible concerns of the Latin American situation. The US economy is performing well, a slow down is coming, the effects of the Asian contagion are working their way through the economy, Brazil is of concern, and equity prices may not currently reflect the true economic reality which the US currently faces. The Federal Reserve Chairman also indicated that it was not the purpose of the central bank to support the value of a the equity markets through monetary policy. If there is a significant market correction, the consumer spending spree which has continued to drive the US economy could end, causing the slowdown to become greater than many had anticipated. As goes the consumer, so too goes the economy.

On the economic front there was a heavy calender of releases in Canada this past week, with the US closed for the Martin Luther King Jr. holiday at the outset of the week there were not as many releases in the US. In the US, housing starts rose 3.5% in December due primarily to much warmer weather, and continued low mortgage rates. In Canada, manufacturing shipments rose 1.0% in November, up 0.5% ex-autos; unfilled orders fell 0.7%; new orders fell 3.8%; trade balance rose to $CDA 1.9 billion, up $CDA 0.2 billion from October; imports declined 0.8%; exports remained constant; composite index rose 0.2%; CPI was 1.0% year-over-year in December with core up 1.5%; CPI was up 0.3% month-over-month, with the core monthly rate down 0.2%. There is some concern over the trend in Canadian CPI, with global disinflationary pressures, weak commodity prices, and excess domestic capacity the Canadian economy may be headed for rougher economic times than its southern neighbour.

The bond markets were stronger on both sides of the border despite a heavy new issue calender. The Government of Canada 30 year long bond shed 3 basis points over the week to close yielding 5.26%. In the US, the Treasury 30 year bond also closed 3 basis points lower at 5.09%. There was some more of the flight-to-quality trade present as the Brazilian situation re-emerged as a problem that is still a long way from being solved. The Canada/US 30 year spread remained unchanged at 17 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets all posted losses on the week. The merger activity which has dominated the first several weeks of the new year was not enough to hold the markets in against concerns over earnings releases and companies with exposure to Latin America. Some of the glitter of the internet stocks seems to have waned. Day-traders have had to meet their daily margin calls, and when momentum shifts on these traders, they must get out of their positions quickly, or they are out of business.

Merger activity continued this week with a couple of the larger deals being Excite announcing its purchase of @Home for $US 6.7 billion and British Aerospace bought GE Marconi's Defense division for $US 12.7 billion.

While Microsoft posted earnings that were 20% better than the Street's expectations, the rest of corporate earnings released this week either just met or fell short of earnings estimates. This caused investors to reconsider the gains that the stock markets had made so far this year on hype and consider the future earnings of corporations.

The TSE had a poor week, dropping 2.45%, or 165.51 points, to close at 6593.91. The DJIA did not hold value much better as it lost 219.88 points, or 2.35%, to close at 9120.67. The S&P500 posted a loss of 1.45%, while the Nasdaq posted a loss of 0.40% after two record high closes on the week.

Next week brings supply in the US debt markets as the US Treasury comes to market. As well, the economic situation in Brazil is still developing and posses a problem to corporate earnings in North America. On-line stock chat rooms still seem to be the fashion of individual investors, so watch the momentum stocks for day-traders. Good trading

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