Weekly Wrap-Up March 24-27, 1997

Closing Numbers

The North American bond markets were given what they were anticipating this week, a 25 basis point increase in the Fed funds rate in the US. The Federal Reserve Board's FOMC met Tuesday and raised the short-term interest rate level, from 5.25% to 5.50%, in a pre-emptive strike against inflationary pressures exerting themselves in the US. The move came as no great surprise to market participants, who participated in a brief relief rally on the news. Weak market short positions were forced to close out their positions, and then the real selling began. Traders and investors are now looking to the economic data to see if the Fed will continue to increase interest rates. The numbers point to continued economic health in the US, as US durable goods orders were up 1.5% (-1.0% expected) and unfilled factory orders increased 1.1% in the month of February. Both of these point to growing scarcity of resources, and the possibility of an even tighter labour market in the US. These numbers combined with a decrease in jobless claims and an increase in home sales of 9% (+1.0% expected) in February contributed to the markets concerns that the Fed will need to raise rates again at the FOMC meeting on May 20.

In Canada, the bond market held in better than its southern neighbour. With the $CDA holding in after the Fed hike, the Bank of Canada has been able to maintain an independent monetary stance so far. The economic data in Canada this week continues to point to a low inflation environment, with few pressures pushing for an increase in interest rates. Industrial product price levels were +0.1% for the month and unchanged on an annualized basis. Canadian GDP was +0.6% (+0.4% expected) for January, giving some in a reason to call for an interest rate increase by the Bank of Canada. Not likely, unless it is done to defend the currency.

This week saw supply in both the US and Canadian markets. Tough week to go to market. The US Treasury issued $US 12.5B 5 year notes, which were taken down by the dealers as few investors showed much of an appetite for new US debt product right after a Fed hike. In Canada, the Province of Ontario came to market, re-opening the 7.60% 30 year issue for $CDA 500M. This issue was well received due to the credit name, which market participants are looking for. The issue came at 24 basis points over 30 year Canadas. Technically, the US market is weak, closing the week above the psychological level of 7%. At this level, conservative stock market investors switch to bonds. The tone is negative as well, extending loses to the fifth week, as yields have been under pressure in anticipation of the Fed hike. The market is now under pressure for technical as well as fundamental reasons. The 30 year Canada closed the week 3 basis points higher at 7.30%, while the US 30 year treasury added 14 basis points to close the week at 7.09%. The Canada/US spread has collapsed by 11 basis points this week to 21. (A basis point is 1/100th of a percent.)

The equity markets in North America started the week with a strong relief rally in anticipation of the Fed move to raise short-term interest rates. The effects of the relief rally were to provide traders better levels to get short at. As with the bond markets, the equity markets began to get concerned about when the next Fed rate hike will come and the effects that will have on the cost to corporate America to do business, and, as a consequence, on corporate earnings. In Canada, the collapse of market capitalization by Bre-X, exacerbated the negative tone in the market. The stock closed the week at $CDA 2.85, after being halted on concerns that the assays of its large Indonesian drilling results are not what they appear to be. The stock has dropped from a high of over $CDA 28, shedding $CDA 13, on Thursday, in 1 hour of trading.

Blue chips, high techs, interest rate sensitive stocks, and the mining sector were all big losers on the week. The TSE closed the week at 5931.75, down 2.35%. Since its high on March 10, the TSE has shed 401.12 points, or 6.33%, and is only 4.72 points above the level it opened at on January 2, 1997. The DJIA has experienced a similar decline, but not to the same extent. The Dow has lost 344.77 points, or 4.87%, since its market high close of March 11, and is still 292.32 points to the good since the beginning of the year.

The markets, in general, have a negative tone. This sentiment has been gaining momentum over the past couple of weeks, which could lead to a continuation of the correction which the financial markets have been experiencing. Next week brings US non-farm payrolls, which will be the focus of the trading session , as analysts and traders attempt to gauge when the next Fed rate hike will come. For Canada, the focus will be on the $CDA and its strength. Should the market take a speculative run at weakening the $CDA, then the Bank of Canada may have to raise interest rates to defend the currency. If not, look for the Bank to maintain an independent policy stance. Good trading.

Weekly Wrap-Up Archives

The Markets Page

The Financial Pipeline Homepage