Weekly Wrap-Up January 4-8, 1999

Happy New Year!!!! That is surely the message being sent to investors in the equity markets. The DJIA, S&P 500 and the Nasdaq all posted record highs the first week of 1999. The TSE 300 managed to do better over the first week of the new year than it did over the whole year of 1998. The introduction of the new Euro saw the $US lose ground to the Yen, British Pound, and $CAD. Fixed income markets suffered as a result of investors' focus on equities and currencies.

The North American fixed income markets suffered from the unbelievable strength of the equity markets. With so much investor attention given to equities and currencies, the fixed income markets could not keep pace. The rise in yields of Japanese bonds over the last two weeks of 1998 provided an investment opportunity to Asian investors returning from the holidays. As well, the initial strength of the new Euro currency, particularly against the $US, provided further impetus for investors to sell $US denominated bonds. The Canadian bond market was caught in the downdraft.

As the new Euro exhibited strength and stability in its first week of trading, two European countries outside of the Euro's scope took the opportunity to cut interest rates. The central bank in Denmark cut over night interest rates 25 basis points. The Bank of England lowered its short-term rate to 6%, a 25 basis point move. The Bank of England has been aggressive in its interest rate cuts over the last several months after having raised rates in the first half of 1998.

On the international scene only one potential market impacting event took place. Minas Gerais, Brazil's third richest state, placed a 90 day moratorium on its debt payments. The state's president, Itamar Franco, is said to have initiated the moratorium in a political maneuver to secure better debt terms, and bolster his political image within Brazil. There are serious economic ramifications if the debt repayments are failed upon, however. The US banking system has a significant amount of exposure to Latin America. Should Brazil default on debt payments, the North American financial system would suffer significant liquidity problems.

Economic data released this week indicates that the economies of both Canada and the US are healthy, and slowing. In the US, the National Association of Purchasing Managers survey indicated that the manufacturing sector continues to slow. For the seventh consecutive month the NAPM survey contracted, reading 45.1 down 1.7 from November. US construction spending rose 0.9% in November, rising 8.8% year-over-year; new home sales rose 7.6% in November; US non-farm payrolls rose 378,000, sending the unemployment rate down 0.1% to 4.3% for December. Worth noting in the US employment data was that an unusually warm December added an addition 104,000 construction jobs to the totals. In Canada, the only significant release on the week was the Unemployment Rate which remained unchanged at 8%, as 24,400 new jobs were created in December.

Due primarily to the overwhelming strength of the equity markets, and a growing belief that current economic strength is sufficient to prevent the Federal Reserve Board, or the Bank of Canada, from cutting interest rates in the near-term. The Government of Canada 30 year bond added 12 basis points over the week, yielding 5.36%. The US Treasury 30 year bond added 19 basis points to close the week at 5.28%. The Canada/US 30 year spread narrowed an addition 7 basis points to 8 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets added to investors wealth almost every day this past week. The Holiday hangover has faded, and investors are in a buying mood. On stock exchanges in the US, records were falling everywhere. The DJIA posted two new record high closes, the S&P 500 posted 3 record high closes, and the Nasdaq closed on a new record high every day this week. Euphoria has hit the equity markets. The TSE managed to post a stronger return over the week than it mustered through out the entire year of 1998.

The gains in the equity markets were premised on the feeling that a recession is not going to hit the US consumer, and that corporate assets are cheap thereby lending themselves to increased merger activity. However, this euphoria should be tempered somewhat.

Atlanta Federal Reserve President, Jack Guynn, told a group gathered on Monday, that the markets have undertaken "the institutionalization of unrealistic expectations" for the US economy.

Once again the belief that all losses are non-recurring and all profits are recurring and increasing has a hold of the market. In some cases the multiples are infinite, as internet stocks continue to drive higher on expectations of future profitability, or even positive cash flow.

The TSE posted one of its best weeks in recent memory. The Toronto Exchange added 382.99 points, or 5.90%, to close the week at 6868.93. The US markets all posted record high closes on the week. The DJIA added 461.89 points, or 5.03%, closing at 9643.32. The S&P 500 added 3.73%, and the tech driven Nasdaq added 6.92%, closing at 2344.41.

Next week brings several important economic releases, as well as earnings reports from some major market players. As long as the equity train is thundering down the tracks, don't stand in front of it. The trend is your friend, and all the momentum points to higher equities. But for how long, do the earnings justify the values. The bond markets are likely to steepen as expectations of a rate cut soon in North America have faded. Good trading.

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