Weekly Wrap-Up June 30 - July 4, 1997

Closing Numbers

Economic data and an FOMC meeting dominated a holiday shortened session on both sides of the border this week. The North American bond markets had a shakey start to the week based on data releases out of the US. New home sales in the US were +7.1% in May, well above street expectations, and the inventory of new homes is the lowest it has been in 26 years. Add to this a Chicago Purchasing Managers Index release showing stronger activity than anticipated (61.5 versus 56.8), and you have a lot of traders second guessing whether or not the Fed will raise interest rates this summer. As the week pressed on NAPM released figures indicating that nation wide the activity is not as strong as indicated by the Chicago PMI. The mid week session was dominated by the Fed FOMC meeting. The Federal Reserve Board Chairman, Alan Greenspan, conducted the two day open market committee meeting to discuss the need for changes to US monetary policy. With no statement made at the close of the meeting Wednesday, the markets began a strong relief rally. US non-farm payroll numbers added to the strength of the bond markets as the unemployment rate in the US rose to 5%, from 4.8% and 217M new jobs were created last month, below street expectations.

The US market wound down bond trading activities early Thursday afternoon in anticipation of the US, July 4, Independence Day celebrations. Canada had to trade through two short trading sessions as Canadian markets closed early Monday for the July, 1, Canada Day celebrations, and had to muddle through Thursday afternoon and Friday without any direction from the US markets. Many Canadian traders took Friday off as well as Tuesday, since any big news was already out in the market. Skeleton staffs complained of the lack of activity, as thin volumes dominated the end of the week activity.

On the week the Canadian and US markets moved lock-step with one another, improving 13 basis points. The US 30 year Treasury closed the week at a yield of 6.62%. In Canada, the Government of Canada 30 year long bond closed the week at 6.68%. The Canada/US 30 year spread closes the week where it started the week, at 6 basis points. (A basis point is 1/100th of a percent.)

The equity markets reacted, when they were open, to the bond markets. Activity in both the US and Canada was muted by the holiday shortened trading sessions. The major economic releases this week, coupled with the Fed decision to leave rates unchanged helped all major North American markets post record highes. The DJIA, S&P 500, and the Nasdaq all posted record closes south of the border, with the S&P 500 posting the strongest gains on the week, with a return of 3.34%. The TSE also posted a record high this week, even in the face of a bearish week for gold stocks. With the price of bullion collapsing in the face of central bank selling, there is little for the price of gold to do, except go south. Bullion closed the week down $US 10.05, or 3%. With industrial demand for gold outstripping supply at present, the threat of continued central bank selling has made gold technically weak, regardless of fundementals. A target of $US 300-315 is possible, given the weeks activity. So far this year, the central banks of Holland and Belgium have been known sellers of gold reserves. The Bank of Australia joined the group this week, selling a reported 167 tonnes of gold, to hold reserves of 80 tonnes. The majority of these banks are buying bonds with the proceeds. The TSE is heavily weighted to the gold sector, implying that the rest of the Canadian market is going to have to work even harder to keep pace with the action in the US.

The DJIA finished the week up 208.09 points, or 2.71%, at a record 7895.81. The TSE managed to advance 2.47%, or 159.04 points, despite the drag of golds on the index, at 6585.44, just below its record high set Thursday. Volumes were not strong for the week, given the holiday shortened sessions in Canada and the US. The technical theory that the US markets are strong during the week surrounding the US Independence Day celebrations, has held true again.

Next week brings 10 year supply in the US, as well as reports from the Richmond District Fed, wholesale trade figures, and PPI. Given the tone of the market, most analysts are pretty optimistic. A major resistance line for the bond market, initiated in January of 1996, is coming close to being violated. If a technical break occurs the market has room to move. The equity markets will be watching for the first Q2 earnings reports, due next week. Fed watchers are now focusing on the next FOMC meeting August, 18. Good trading.

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