Weekly Wrap-Up June 15-19, 1998

Closing Numbers

The North American bond markets were focused on the continuing financial uncertainty in Asia, particularly Japan. The Japanese economy is in recession, the currency is continuing to weaken, fiscal loosening is required to stimulate domestic demand and serious reform to the banking sector is required to stabilize the Japanese markets. In trading dominated by the flight-to-quality, both Canadian and US long bonds set record low yields early in the week. As international intervention in the currency markets on behalf of the Bank of Japan developed, in an effort to support the Yen, the bond markets lost some of the bid which had existed earlier in the week.

Economics are virtually lost in the shuffle at this stage as investors are focused on the fall-out from Asia on earnings, commodity prices and corporate demand. In the US this week housing starts were down 0.7% in May, building permits rose 1.8%; industrial production rose 0.5%; capacity utilization grew 0.1% to 82.2%; CPI rose 0.3% month-over-month, with the core rate up 0.2%; the international trade balance for April was $US -14.46billion. In Canada, manufacturing shipments for April declined 0.6%, inventories grew 0.3%, unfilled orders grew 0.7%, new orders dropped 0.3%; international trade balance dropped to $CDA +1.2billion, with exports growing 0.1% and imports rising 2.6%; CPI rose 1.1% year-over-year, with the core rate up 1.4%, month-over-month CPI rose 0.4%, plus 0.2% in the core. Over 14% of the increase in CPI in Canada was directly related to travel accommodations.

The Canadian 30 year long bond closed at 5.51%, a 1 basis point improvement on the week. The US 30 year Treasury bond was unchanged by week's end at 5.67%. The Canada/US long spread moved in 1 basis point to -16. (A basis point is 1/100th of a percent.)

The North American equity markets were hurt by the events unfolding with respect to Asia, and in particular Japan. With many companies in North American dependant on international trade with the Pacific Rim for a portion of their corporate earnings, any slow down in demand from these previously dynamic economies will have a negative impact on the bottom line. Domestic companies competing against Asian imports are going to have to cut costs in order to maintain market share in the face of cheaper imports. Also a drag on corporate earnings. As a result the equity markets took a hit in the flight-to-quality which aided the bond markets.

The TSE lost 157.53 points, or 2.15%, to close the week at 7153.39. The $US 13.70 bounce in gold could not help the Canadian exchange as concerns over exporters' earnings continued, as a result of the continued melt-down in Asia. The DJIA fared little better closing down 1.38%, or 122.07 points, at 8712.87. Gold was the performer on the week as the decline in the $US versus the Yen on the back of central bank intervention gave a bid to the precious metal. Bullion finished the week up $US 13.70, or 4.8% at 299.00.

Given the recent turmoil in the markets at the hands of the Asian economic melt-down, the focus next week will be on the outcome of the G7 and 12 Asian Pacific countries meeting over the weekend. Should no consensus on action emerge, look for the flight-to-quality trade to dominate to the benefit of the bond markets. If an action plan emerges which looks for structural change to the Japanese financial sector and tax incentives to induce domestic spending, then look for the equity markets to benefit. If no consensus emerges then the next concern will be when will China devalue its currency. Look for it to happen sooner rather than later if the Yen continues to drop, and the US does not concede to China's demand for entry into the WTO. Good trading.

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