Weekly Wrap-Up July 27-31, 1998

Closing Numbers

The North American bond markets suffered from the effects of political uncertainty, both domestically and abroad. In Canada, the ailing 'Loonie' is causing concern not only for international investors, whose capital is eroded by the declining dollar, but also by domestic investors who feel the Bank of Canada will be forced into raising short-term interest rates to defend the dollar, thereby eroding the earning power of corporate Canada. The depressed commodity prices, as a result of a global drop in demand, are not doing anything to help a country known as the 'hewers of wood and drawers of water'. South of the border, transactional immunity for former White House intern Monica Lewinski and her mother soured the bond market as concerns over whether or not special prosector Kenneth Starr has enough to hurt President Clinton re-emerged. Will there be an impeachment?

The weak bond markets were helped into the close of the week by news out of Japan that no one wanted the Minister of Finance position. The job was grudgingly accepted by 78 year old former Prime Minister Kiichi Miyazawa. The new Finance Minister reportedly started with the Department of Finance in 1942, so he has seen the transition of a devastated economy once, maybe he can bring that magic touch to bear on the troubled financial sector in Japan again. With comments out of the Japanese cabinet that the market should determine the appropriate level for the yen, it did not take long for international money to flow back into North America.

In the US, existing home sales fell 2.3% in June; consumer confidence declined 2.8 to 135.4; durable goods orders dropped 0.2%; the employment cost index for the second quarter rose 0.9%; new home sales rose 3.8% in June; US GDP for the second quarter was up 1.4%. In Canada, industrial prices rose 0.1% in June; raw materials fell 3.2%; number of employees dropped 0.1% in May; weekly earnings declined 0.2%; department store sales dropped 4.9% in June; GDP declined 0.2% in May, with April revised to unchanged.

Economic data released this week continues to indicate a healthy economy, with little signs of inflation, which is slowing naturally due to decreased demand internationally. This is good news for the US economy since it will mitigate the chances that the Federal Reserve Board will raise short-term interest rates in order to stem inflation. It is bad news for the Bank of Canada, since a lack of any obvious inflationary pressure will prevent the Bank from raising short-term rates to defend the dollar. It is a tough political move to increase interest rates with unemployment at almost 9% and inflation running below the bottom end of the Bank of Canada's target range.

The Canadian 30 year long bond added 5 basis points over the week to close at 5.58%. The US 30 year Treasury bond closed the week at 5.72%, up 5 basis points. The Canada/US 30 year bond spread was unchanged at -14 basis points. The Canadian market is positioned to underperform the US market until some stability emerges in the foreign exchange market vis-a-vis the Canadian dollar. (A basis point is 1/100th of a percent.)

The North American equity markets experienced a volatile week, with the key ingredients being political uncertainty, and earnings concerns. Again the Lewinski immunity and the Canadian dollar woes handed out a fair bit of punishment to the markets, but earnings concerns added to the fuel in the equities markets.

The TSE closed the week down 239.15 points, or 3.34%, at 6931.43. Those firms with significant international exposure continue to be hurt by the Asian contagion as foreign demand for both Canadian raw materials and finished goods is on the wane. Producers who are primarily focused on the domestic market continue to hold in. Look for the financial services sector, the one bright star on the TSE this year, to continue to be hurt by $CDA concerns. The DJIA closed the week at 8883.29 points, down a mere 0.60% for the session. This masks the true volatility experienced in New York this past week. Domestic political concerns, and the continued hot and cold love affair for companies and their quarterly earnings plagued the major markets all week. Look for more of the same over the near-term as Lewinski, corporate earnings, and Japanese lip service with respect to financial reform dominate. Do not be surprised if Russia flares up again, and the Chinese threaten to devalue the yuan.

Next week brings non-farm payrolls in the US on Friday and this should dominate the market sentiment. Look for the markets to continue to trade in a volatile manner as many firms are well over-valued on a fundamental basis and earnings disappointments will be reflected only too well by disapproving investors. Buying on dips, while an excellent long-term strategy, may succumb to the short-term desire to lock in current profits and wait for less turbulent waters. Canada will continue to underperform the US until the Canadian dollar shows some signs of life. Good trading.

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