Weekly Wrap-Up June 23-27, 1997

Closing Numbers

The North American bond markets faced a couple of tough challenges over the course of the week. The Canadian bond market had to endure the usual spill over effects from the US market, as well as absorb the effects of an unanticipated Bank of Canada short-term interest rate hike. In the face of an underperforming Canadian dollar, and constant central bank intervention in the currency markets, Bank of Canada Governor, Gordon Thiessen, raised short-term Canadian interest rates 25 basis points. This was the first interest rate hike by the central bank in 28 months. While some commentators attempted to put the 'pre-empting inflation' spin on the move, the true reason was defense of the $CDA. Foreign investors were repatriating maturing funds, rather than reinvesting those funds in the Canadian market. Canadian domestic accounts were picking up the slack, as they begin to feel the credit squeeze of decreased government issuance, causing the bond market to continue to perform well in the face of a floundering currency.

The US market had to weather the storm of Japanese Prime Minister Hashimoto's comments, and the subsequent rumours of Asian central bank selling in the face of new supply. Mr. Hashimoto stated that he hoped "the US will engage in efforts and in cooperation to maintain exchange stability so we will not succumb to the temptation to sell off Treasury bills and switch our funds to gold." Rumours later in the week stated that an Asian central bank was in the market selling a large amount of US 10 year product ($US 1B) adding to the markets concern. The US market had to digest the issuance of $US 15.5B 2 year bonds, and $US 11.5B 5 year bonds. The 2 year issue was moderately received, while the 5 year was well bid with a strong 3.19:1 bid to cover ratio.

Little in the way of hard economic data meant that the bond markets chopped around on technicals, rumours and political news. The Canadian market underperformed the US market on the week, as the Bank of Canada move to raise short term interest rates caused concern. The Government of Canada 30 year bond finished the week at 6.81%, up 13 basis points on the week. The US Treasury 30 year bond was 8 basis points weaker by the close Friday, posting a yields of 6.75%. The Canada/US 30 year credit spread widened 5 basis points to close the week at 6 basis points.

The North American equity markets faced a choppy week as the Hashimoto comments had a more adverse effect on equity markets, than on the bond markets. With little reason for the Federal Reserve Board Chairman, Alan Greenspan, to pull the trigger on an interest rate increase at next weeks FOMC meeting, politics, technicals, rumours and earnings expectations are driving the equity markets. A little window dressing by fund managers over the past week, also contributed to the chop. As the second quarter draws to a close, fund managers are booking profits, and dressing up their performance in order to look good in the eyes of management, and investors.

The US markets only managed to post one record high close on an otherwise loosing week. The Nasdaq posted a record close Tuesday, and then joined the broader markets in underperforming. The DJIA was down 108.79 points, or 1.40%, on the week to close at 7687.72. The S&P 500 and Nasdaq also ended the week in the red. The TSE was plagued by our gold fever, not excitement, but rather apathy, as the price of bullion posted its lowest close in 4 1/2 years. The host of merger announcements this week, which would have normally drummed up great excitement in the Canadian markets, managed to save the TSE from following the gold sector south. Golds, which account for approximately 10 percent of the TSE, were down 2.96% on the week. The Bank of Nova Scotia announced a friendly take-over of National Trust, and The Royal Bank of Canada bought the London Life Insurance group from Trilon. Both deals were well received by the markets, as each fits well with the strategy and needs of the businesses involved. The merger announcements helped limit the TSE to a 1.31%, or 85.03 point, loss on the week to close at 6426.40.

Next week brings quite a bit of economic information about the health of the US economy, as well as the long awaited FOMC meeting, all crammed into a holiday shortened trading session. The US will post NAPM, construction spending, manufacturing orders, new vehicle sales, and non-farm payrolls, as well as the FOMC meeting, July 1-2. The Canadian market will have an early close Monday, as traders take July, 1, off to celebrate Canada Day. This year the country celebrates its 130th birthday. The US also celebrates its Independence Day, Friday July, 4. Expect an early close in the US markets Thursday as traders pack up early for the long weekend holiday. Good trading.

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