Weekly Wrap-Up March 22-26, 1999

The North American markets were relatively quiet this week. The lack of conviction on market direction is keeping investors from getting too involved. NATO military action has provided minor support to the market, however no significant flight to quality trade has developed. Supply in both the US government and corporate market allowed the Canadian bond market to outperform. Continuing concern over current equity valuations and earnings growth projections have many investors scratching their heads. With the Dow failing to close above the psychological 10,000 level, the momentum that had been driving the market has moved to neutral. With the majority of the earnings results in the market for the last quarter, it could be difficult for the markets to gain any solid investor interest.

The North American bond markets were relatively quiet this week. The lack of conviction on market direction is keeping investors from getting too involved. NATO military action has provided minor support to the market, however no significant flight to quality trade has developed. Supply in both the US government and corporate market allowed the Canadian bond market to outperform.

Adding to the performance of the Canadian fixed income market were comments made early in the week by Bank of Canada Governor Gordon Thiessen. The central banker indicated that the Canadian economy is moving into a stage were the bank may be able to act independently of the US Federal Reserve Board. Strength creeping back into commodity prices may see a stronger Canadian dollar, which in turn would allow the Bank to act on its own. Continuing decreases in measures of inflation have the Bank somewhat concerned over the potential of deflation. However, it should be noted that with the growth of money supply in the G7, it is unlikely to see a sustained problem with deflation in North America without some significant external shock. The bond market took the comments to mean that the Bank of Canada may ease in the near term, moving interest rates lower. Not likely.

The US bond market suffered from poor technical conditions and significant supply pressures, keeping the market from keeping pace with Canada. The US Treasury issued $US 15 billion in 2 year notes, which were well received. AT&T issued $US 8 billion in bonds, making the deal the largest corporate deal done. There was a total if corporate bond issuance in excess of $US 17 billion in the US last week. Investors had a lot of bonds to digest.

Germany continues to feel the pain of economic slowdown. The problems Germany is facing stem form the lack of demand form the former Soviet states, as well as structural problems as current policies do not encourage economic growth. However, the continuing decline in the value of the new Euro, introduced in January, should help the economic competitiveness of Germany. Where goes Germany, so goes Europe.

Gold, which had been slowly clawing its way back off the floor, was beaten back to the ground again this week. Bullion dropped $US 4.40 to close at $US 279.70. The decline came in the wake of comments out of the G7 countries that the IMF should consider liquidating part of its gold reserves in order to ease the developing nations debt burden. Comments out of all G7 governments, except Italy, pushed for the need to help reduce the debt burden of the Third World. Canadian Prime Minister, Jean Chretien, echoed remarks made last week by President Clinton regarding the need to sell gold from the reserves of the IMF. This seems like a counter productive comment form the Prime Minister of a country which is home to so many mining and exploration companies focused on gold.

Economic data released this week was light. Of note in the US, durable goods orders dropped 0.5% in February. In Canada, department store sales were up 4.8% month-over-month in January; manufacturing shipments declined 0.7%; wage settlements rose 1.3%; industrial producers price index fell 0.4% in February for a decline of 0.5% year-over-year; raw materials dropped 1.8% in February for an annualized decline of 10.3%.

Changes in value in the bond markets had more to do with supply discrepancies than market sentiment. The bond market continues to trade with a weak tone, as the technical picture continues to favour a test of lower prices. The more than $US 32 billion in supply last week helped push yields in the US market higher. While, by contrast, no supply in Canada as several provinces head into their budget black out periods, kept a supportive bid in the market. The Canadian 30 year bond shed 2 basis points on the week to close at 5.43%. The US 30 year Treasury bond added 6 basis points, to close the week at 5.60%. The Canada/US 30 year spread has moved deeper into negative territory at -17 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets were a mixed bag last week. Continuing concern over current valuations and earnings growth projections have many investors scratching their heads. With the Dow failing to close above the psychological 10,000 level the momentum that had been driving the market has moved into neutral. With the majority of the earnings results in the market for the last quarter, it could be difficult for the markets to gain any solid investor interest.

The Merger and acquisition trail slowed somewhat this week. The big deals announced did not generate any serious support for the markets. Comcast bought MediaOne; IBM and EMC entered into a 5 year $US 3 billion technology alliance involving specialized drive technology; San Paulo merger with Banca di Roma and Uncredito Italiano merged with Banca Commerciale Italiana, as financial sector consolidation continues on a global scale.

Market guru Abbey Joseph Cohen announced this week that the Dow should close the week 1999 at 10,300 up from her previous estimate of 9,850. In the market environment of the past several years, this type of comment would have had investors scrambling to get invested in the market. However, her comments had little effect on the market this week. One possible reason for this is the fact that the asset mix recommended by Ms Cohen has seen the equity component shifted down to 70% from her previous recommended structure of 72%.

The TSE closed the week up 36.38 points, or 0.55%, at 6635.20. The DJIA continued to lose ground after failing to close above 10,000, closing down 81.31 points, or 0.82%, at 9822.24. The S&P500 lost 1.27%, closing at 1282.80, while the tech heavy Nasdaq was virtually unchanged at 2419.17.

Next week brings some economic data of interest to the market notably US non-farm payrols, as well as the Federal Reserve Board's Open Market Committee meeting. Rates will remain stable, and no change in FOMC bias is expected. The Easter weekend should see the market non-existent on Friday, so look for an early close on Thursday as trading desks look to make a long weekend a little longer. Good trading.

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