Weekly Wrap-Up March 15-19, 1999

The North American equity markets drew all the attention of investors this week, as the Dow was set to makes its assault on 10,000. The DJIA managed to trade above the number 3 times this week, but failed to close above the psychological level. The bond markets were relatively quiet this week as thin trading, dominated by technicals prevailed in a market with no conviction. Market participants were unmoved by the string of inflation friendly data released this week.

The North American bond markets were relatively quiet this week as thin trading, dominated by technicals prevailed in a market with no conviction. Market participants were unmoved by the string of inflation friendly data released this week, as all eyes were focused on the Dow and its pursuit of 10,000.

Gold was hard hit this week after having recovered well over the past several weeks. The IMF was rumoured to be in the market selling gold in an effort to sure up its coffers in order to further aid developing economies. Later in the week, US President Clinton indicated that he was in favour of the IMF pursuing such a policy. The price of bullion dropped 2.9% on the week.

Adding to an already deteriorating economic situation in the European Union came some political turmoil. The Commissioners of the EU resigned en masse this week. Reports of corruption and incompetence forced the departures. Little has been made of the resignations as many in Europe believe the Commissioners were simply figureheads. Still, with the economy deteriorating, there is little need for other distractions.

Japan has seen the stock markets rise to levels not visited for almost a year. Talk of financial reforms, economic stimulus, and the economy turning the corner, have foreign investors flocking back into the market. This, however, is causing an unwanted side-effect, a strengthening Yen. Finance Ministry Official Kuroda indicated that the Yen has risen in value too quickly over the past several weeks. The effects of the stronger Yen have been felt over the past year as Japan's trade surplus has fallen 26.9%, almost all of which has been blamed on the stronger Yen.

Romania's central bank has announced that a plan will be released next week to deal with the country's collapsing currency. The Romanian currency, the Leu, has lost 28% of its value so far this year, and the central bank is planning for a 40% deprecation. However, due to the rate of the decline and the state of the Romanian economy, fears are rising that Romania will join the growing list of countries to default on foreign debt commitments.

On the economic front, a host of data were released over the past week. Again, there is little in the way of inflationary pressures showing in an environment of strong economic growth. In the US, housing starts fell 0.6% in February, with single family starts rising 1.1%; industrial production rose 0.2%; capacity utilization remained at 80.3; durable goods orders rose 0.9%; CPI rose 0.1%, for an annualized rate of 1.6%; trade deficit ballooned $US 16.99 billion. In Canada, new vehicle sales rose 3.6%; existing home sales rose 11.8% month-over-month for February; merchandise trade surplus rose $CDA 2.7 billion; CPI rose 0.7%, putting it below the Bank of Canada's target band of 1-3%.

Worth noting is the US trade deficit which continues to grow. The US has experienced increased imports and decreased exports for the past four months. The US economy is dependant on the rest of the globe to finance its growth. With the continued sluggish growth in Asia and declining economic activity in Europe, this imbalance cannot continue indefinitely. As well, talk is growing that if the Canadian merchandise trade surplus continues to grow, the current account may move into surplus and provide the Bank of Canada with some room for independent monetary action. As long as the Canadian dollar is stuck deep in the mud, there is little risk of an independent monetary ease in Canada.

The bond market in Canada suffered from the apathy induced by lack of investor participation. This was due to the markets overall lack of conviction on the direction interest rates are moving, and the fact that many investors in Canada were on 'Winter Break' vacations with their families. In the US bond market, technical trading dominated the week as 'stop loss' levels were triggered around the 5.50% level causing a mid-week rally. However, rumours that the AT&T multi-tranche deal coming next week in the US would be significantly larger than $US 6 billion had many traders setting up shorts ahead of the deal.

In Canada, the Government 30 year long bond finished the week 2 basis points higher , to yield 5.45%. The US Treasury 30 year bond also finished the week 2 basis points weaker at 5.54%. The Canada/US long bond spread remains at -9 basis points, unchanged from last week. (A basis point is 1/100th of a percent.)

The North American equity markets drew all the attention of investors this week, as the Dow was set to makes its assault on 10,000. The DJIA managed to trade above the number 3 times this week, but failed to close above the psychological level.

Merger activity was hectic this week. Fleet Financial Group announced its purchase of BankBoston for 16 billion; Ciena bought Lighters and Omnia Communications for 1 billion; DuPont bought Pioneer HiBreed for 7.7 billion; El Paso bought Sonat for 6 billion in a gas transmission deal; Global Crossing offered 11.2 billion for Frontier Corp.; Renault offered 5.3 billion for 35% of Nissan; AEC bid 750 million for PacAlta; RioCan offered 700 million for RealFund. The M&A desks must just love this much work.

The TSE added 36.76 points, or 0.56%, on the week to close at 6598.82. The Toronto exchange was aided by the boost in oil and gas shares. Saudi Arabia announced to its customers this week of its intention to cut back on supplies of oil for export. This has lead to greater credibility that the latest round of production cuts would be met. In New York, the DJIA set two new record highs and pierced the 10,000 level three times but failed to close above it. The DJIA rose 27.20 points, or 0.28%, to close at 9903.55. The S&P500 set two records closing up 0.36%, while the Nasdaq added 1.67% on the week. The techs took it on the chin as Morgan Stanley cut IBM's price target to $US 195 from $US 215, while maintaining a market outperform rating on Big Blue.

Next week brings many investors back to the market after a week off. New corporate bond issues are lining up in anticipation of their return. There is still little confidence in either direction for the bond or equity markets. It should be noted that investors are becoming increasingly focused on corporate earnings as there is a resurgence of fundamental analysis. Good trading.

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