Weekly Wrap-Up March 1-5, 1999

Fears of inflationary pressures, and inferences by Federal Reserve Board Chairman Alan Greenspan that too much liquidity had been applied to the US market last fall, could have meant an interest rate increase in the US as early as the next Fed meeting March, 30. However, an inflation friendly non-farm payroll report combined with a substantial short covering rally in the bond market suggests that the Fed will be on hold in the near-term. The equity markets closed higher, with the Dow posting a new record high. The rally on Friday was considered a short covering rally in bonds, and participants should look for follow through before taking this as a shift in market sentiment.

The North American bond markets had a rough ride ahead of the US non-farm payrolls figure, only to rally back to close to unchanged by the close. Fears of inflationary pressures, and inferences by Federal Reserve Board Chairman Alan Greenspan that too much liquidity had been applied to the US market last fall, could have meant an interest rate increase in the US as early as the next Fed meeting March 30. However, the market seems to be loosing its enthusiasm for a near-term rate hike.

A significant amount of activity in Japan over the last week has allowed investors to put a cautiously optimistic spin on the news emerging from the country. Yields on Japanese Government 10 year bonds have dropped from 2.17% to 1.61%. Short-term interest rates are 0.02%, the Bank of Japan is practically giving money away. Japan is taking the advice of IMF official, Stanely Fischer, easing monetary conditions further with a $3 billion infusion of capital into the market in an effort to boost the economy and ease the liquidity trap currently faced. The banking system is beginning to show signs of reform. A total of 15 financial institutions have applied for about $US 62 billion in public money to replenish depleted balance sheets as the result of bad property loan write-downs. As well, cross holdings of equities among major Japanese corporations, done to solidify business relationships, has begun to be unwound. This is good for the corporate balance sheets, but could provide a cap on the Nikkei over the near -term.

Thailand has announce the appointment of corporate restructuring experts and debt mediators in an effort to help the country with its private sector debt burden. This is a positive development for investor psychology, as the uncertainty associated with corporate debt repayment has been a stumbling block for the country's economic recovery.

Bad news for European economic sentiment, as the Euro continues to weaken from its introductory level on January 1, 1999. The business confidence survey in Germany tuned negative for the first time in three years. Corporate managers responding to the survey indicated that the general economic weakness in Europe and confusion over the German government's economic policies are contributing to the negative sentiment.

Closer to home, Brazil has announced that the central bank will adopt a more flexible approach to defending the country's currency, the real. Officials indicated that the central bank would utilize interest rates to a greater extent, and not confine them to predefined ranges. This will be good for foreign exchange reserves, but provide some uncertainty as to the signal the central bank is sending with it's monetary policy stance. Effective policy communication will be necessary to manage the markets expectations.

Economic data released in North America indicated that the economies on either side of the 49th parallel are robust. In the US, personal income rose 0.6%; personal spending rose 0.3%; the savings rate rose 0.1%; Chicago PMI was 52.9, up 2.6; NAPM rose to 52.4 from 49.5 (above 50 is said to be expansionary); new home sales fell 5%; factory orders rose 1.7%; unfilled orders grew 1.6%; inventories fell 0.3%; non-farm payrolls rose 275,000; unemployment rate rose to 4.4% from 4.3%; hourly earnings rose to 13.04 from 13.03; average hours worked rose 0.2 hours. In Canada, the only release of significance was the GDP figure, indicating a rise of 2.8% aided primarily by exports to the US

The strong economic data released over the course of the week in both Canada and the US sent concerns through the market that the Federal Reserve Board would move to a more restrictive monetary policy as early as March, 30. The market friendly non-farm payrolls data allowed the bond markets to rebound to near closing levels of the previous week. In Canada the 30 year long bond closed unchanged on the week at 5.50%. In the US, the 30 year Treasury bond added 1 basis point to yield 5.59%. This masks the volatility felt in the markets as the Canadian market had yielded 5.57%, and the US 5.70% earlier in the week. Corporate supply continues to be issued and investors should look for opportunistic issuers to come to market if the better tone holds. (A basis point is 1/100th of a percent.)

The North American equity markets experienced a significant rally late in the week to bring them into positive territory. Inflation friendly non-farm payrolls data combined with a substantial short covering rally in the bond markets allowed the equity markets to move higher. Merger activity helped to fuel the week-ending rally as the DJIA set a new record high close.

Merger and acquisition activity this week saw the announcement of a couple of large deals on both sides of the border. GE Plc announced $US 1.74 billion bid for Reltec; Alcatel offered $US 2 billion for Xylan; Intel will pay $US 2.2 billion for Level One; Adelphia will buy Century Communications for $US 5.2 billion; AT&T announced a merger with MetroNet of Canada valued at $US 7 billion; IBM and Dell announce a technology sharing and patent cross licensing agreement valued at $US 16 billion. The AT&T/MetroNet deal could pave the way for the new entity to buy Rogers-Cantel cellular in order to offer a completely integrated communications solutions provider for business in Canada.

The merger activity helped spur on some of the technology and communications companies, while the rally in the bond markets provided support to the financial sector. The TSE added 102.42 points, or 1.62%, to close at 6415.11. The Dow posted another record for 1999, adding 492.50 points, or 4.62%, to close almost 1% above the previous record at 9736.08. The S&P 500 added 3% on the week while the tech laden Nasdaq added 2.15%.

With the host of economic data out of the way, and concerns of a Fed tightening pushed back from the Fed meeting on March, 30, the market will have to post some follow through buying to confirm any break-out, or change in investor psychology. The rally on Friday was considered a short covering rally, and participants should look for follow through before taking this as a shift in market sentiment. Investors appear to be better sellers of rallies, rather than buyers of dips. Watch the sentiment early next week, any new issues are going to be done sooner rather than later this month, as investors prepare to take vacations with their children out of school for the March Break. Good trading.

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