Weekly Wrap-Up June 22-26, 1998

Closing Numbers

The North American bond markets were little changed on the week. The inability of the G7 and 12 Asian Pacific nations to come up with a concrete plan for the stabilization of the Asian economies left the market uninspired, with the flight-to-quality trade exhibited the last two weeks mitigated by the threat of further $US/Yen intervention by the Fed. With US President Clinton in China, there are concerns that the US will promise to help defend the Yen, and drop its traditional opposition to China’s entry into the World Trade Organization. If these issues do not appear to be front and centre on the discussion list, then the Chinese may devalue the Yuan and send the region into further economic turmoil.

On the economic front this week there were several releases, which indicated that, the economy is cruising along at a steady clip with little inflationary pressure. In the US durable goods orders in May declined 2.6%, ex-transportation component was down 2.3%; final GDP for the first quarter was revised up to 5.4% from 4.8%, with the price index showing a inflationary jump of 1.2% on a year-over-year basis; existing home sales for May rose 1.0%; personal income rose 0.5%, while consumption grew 0.6%. In Canada, net foreign investment in April declined $CDA 4.73billion; composite index dropped 0.5%; wholesale sales rose 1.3%, with inventories growing 0.4%; retail sales rose 1.0%, plus 0.4% ex-autos; industrial price index was unchanged in May, while the raw materials index dropped 0.7%, number of employees dropped 0.1%, while average hourly earnings grew 1.6%.

The bond markets had a barn-burner of a week. The Canadian government looked to tap the German Deutsche Mark market for $CDA 3.26billion in the 10 year and 18 year sectors of the curve. This was done to diversify the issuance base and establish a foothold in what will eventually be an Euro denominated market. The Province of British Columbia tapped the same market this week. The Canadian 30 year long bond traded in a lack-lustre 4 basis point range on the week closing at 5.53% adding 2 basis points from last weeks close. The US 30 year Treasury bond close the week at 5.63% shedding 4 basis points on the week. The Canada/US long bond spread moved closer to par at -10 basis points, 6 tighter than last week. (A basis point is 1/100th of a percent.).

The North American equity markets breathed a sigh of relief this week as the anticipated OPEC meeting and continued stable low interest rate environment gave a boost to the markets. The OPEC meeting promised to cut a further 1.72 billion barrels of oil per day from production pushing oil higher, and helping the oil & gas sector do better. This all came to an end by week’s end as a Saudi Arabian oil official stated that expecting to oil cartel to stick closely to the self-imposed quotas was unrealistic and some cheating should be expected. As well, the rumoured merger between Long Term Credit Bank and Sumitomo Trust in Japan gave the market some hope that the structural changes necessary to start to bring the Japanese economy out of the doldrums had begun. With Japan in a recession, as noted by the recent data indicating vehicle production declined 19.7% year-over-year and department store sales dropped 0.4% (the 13th decline in 14 months) any news that can shed some light on the end of the tunnel is welcome news. However, that light is very faint and a long, long, way away.

The TSE finished the week up 2.59% at 7338.66. The DJIA closed the week higher by 2.66% at 8944.54. The S&P500 added 2.96%, the Nasdaq was up 4.95%, and gold was off 1.77%. The markets were fueled by additional merger activity as Merrill Lynch bought Midland Walwyn, Call-Net bought fONOROLA in Canada, and AT&T bought TCI in the US. Mergers and rumoured take-overs have definitely fueled the markets, with fundamentals losing ground to momentum.

Next week brings a silly trading week as both Canada and the USA celebrate the birth of their respective nations. The Canadian market closes early Tuesday and will remain closed until Thursday morning. The US markets closes early Thursday and will remain closed until the following Monday. Also next week is US non-farm payrolls. With quarter end at hand there will be very little activity in thin markets. A fashion trend emerging is the hipster look of the roaring twenties. With valuations in the equity markets as high as they currently are, are there any other momentous occasions from that era we should be aware of? Good trading.

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