Weekly Wrap-Up June 8-12, 1998

Closing Numbers

The North American bond markets benefitted from the flight-to-quality scenario this week as investors sought a safe haven for funds with the Asian financial turmoil continuing to cause concern. Japan has officially entered into a recession, and the Yen has hit an eight year low versus the US dollar, raising fears that the poor health of Japan will preclude the other Asian economies to recover from their financial woes. The Canadian dollar posted a record low close to the $US this week, as investors sold Canadian dollars to buy US dollars on concerns that the Canadian economy will be dragged down by weak Asian demand for Canadian exports of raw materials. The continuing decline in commodity prices is not helping the Canadian dollar much either.

Economically, this week's numbers reinforced the notion that the Canadian and US economies are still healthy, with little inflationary signals present. In the US wholesale inventories for April declined 0.6%; retail sales in May grew 0.9%, up 0.4% ex-autos; business inventories rose 0.2% in April; PPI in May was up 0.2%, with the core ex-food and energy up 0.2%. In Canada, capacity utilization rose 0.3% to 86% in the first quarter; housing starts fell 5.2% on an annualized basis; new house price index was unchanged in April at 99.9; new vehicle sales rose 5.9% in April.

The Canadian bond market significantly underperformed the US market as the currency did not help investors see a reason to buy Canada. The Canadian 30 year bond shed 4 basis points to close the week at 5.52%, after setting a record low close yield of 5.51% earlier in the week. The US 30 year Treasury was stronger by 12 basis points, setting a record low close Thursday of 5.66%. This is the lowest the US 30 year bond has closed since the Treasury first started issuing them in 1977. For the week the US long bond closed at 5.67%. The Canada/US 30 year spread is moving back towards parity as the US outperforms.

The North American equity markets had a volatile week, as the Asian factor came to dominate investor sentiment, in turn damaging companies share prices with exposure to Asia or Asian competition. The slowing demand from Asia may have an impact on the bottom line for North American firms, as the impact is felt on the bottom line. A decrease in earnings, and the quality of the earnings may result. Investors took the opportunity to lighten up on their equity holdings, switching into bonds.

The TSE lost 197.31 points, or 2.63%, to close the week at 7310.92. The Toronto exchange was particularly hurt by the drop in oil and gold. The DJIA dropped 2.24%, or 202.77 points, to close at 8834.94. The Nasdaq and the S&P500 were down 2.12% and 1.35% respectively.

The markets are volatile due to the uncertainty surrounding the effects of Asia on the earnings of North American firms. The slumping commodities markets are going to continue to be a drag on the Canadian exchanges, as low prices and high inventory levels continue to depress those industries. The fixed income markets have established a new range, but look for some orderly selling over the next week as investors book profits. Good trading.

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