Weekly Wrap-Up May 26-30, 1997

Closing Numbers

With the US and London markets closed on Monday, the Canadian bond markets had little to start the week on given that any Canadian economic indicators mean little in the face of the upcoming Federal election. Significant economic indicators also had to take a back seat to supply, which came in both the US and Canadian markets. The Government of Canada came to market with a re-opening of $CDA 2.6B 5.5%/02, the issue was well received with a 2:14 bid to cover. The re-opening brings the total outstanding float of the issue to $CDA 5.3B. The US Treasury was in the market with both 2 year and 5 year bonds this week. The $US 16.5B 2 years were sloppier than the pre-auction run up in price would have indicated, setting up a negative tone for the 5 year. The $US 12B 5 years came well bid and received a strong bid to cover. Look for more supply in Canada, as the Government re-opens the 4.25%/26 real-return bonds, tapping the market for $CDA 500M.

Issues playing with the bond markets this week were dominated by the weakening position of the EU on a single currency by the Mastricht deadline. This saw a flight to quality as international investors moved into the US market. Attractive yields for conservative investors also lent support to the US market as the 7% level in 30 year bond proved too tempting for fund managers and retail investors to leave alone. In the US, economic data was thin, and traders were grasping to find real reasons to do anything, other than prepare for the supply. At the week's end a revision to Q1 US GDP indicated that the economy had grown at 5.8%, revised up from 5.6%, but was below street estimates of 6.0%. A number like this two months ago would have sent the market into a tail spin, but now it is shrugged off due to the limited signs a emergent inflation. In Canada, there were a host of economic indicators, all pointing to an economy with growing strength, little inflationary concerns and lots of spare capacity in both the production and employment areas. The big concern for the Canadian market was the upcoming Federal election, June 2. Polls have indicated a decline in support for the ruling Liberal party, under the leadership of Prime Minister Jean Chretien. This could lead to a Parliament divided along regional lines, with the Liberals forced to attempt to piece together a minority government. This would jeopardize the Liberal's deficit fighting program, which is a key factor in the Bank of Canada being able to maintain an independent monetary policy vis-a-vis the Fed.

Overall, both the US and Canadian markets chopped around in a channel pattern, typical of markets with little resolve. Most players are indicating that the non-farm payrolls number out at the end of next week is what they are waiting for before any large positions are strapped on. The Canadian 30 year bond under performed the US 30 year Treasury bond by 2 basis points over the weak, as the Canada/US spread widened to 11 basis points, reflecting the concern for a stable political environment after the Federal election, June 2. The yield on the Canada 30 year closed at 7.03%, while the US long bond closed the week at 6.92%, 4 and 6 basis points stronger respectively.(A basis point is 1/100th of a percent.)

The equity markets displayed a considerable amount of life in comparison to the interest rate markets. The record closes on thin volume a week ago Friday were superceded by new record closes on all major North American exchanges again this week. The DJIA set a new record at 7383.41, the S&P 500 set a new standard at 849.71, and the tech heavy NASDAQ set two new record closes with 1410.18 the best of the two. The TSE also topped the record close set last Friday with a posting of 6491.13 on Monday, which was again dominated by thin volumes. The technical nature underlying the TSE close set it up for profit taking the rest of the week, just holding onto positive territory for the week with a closing rally on Friday.

Earnings reports are being released for the second quarter, and these are causing some concern for the markets as companies are once again attempting to manage the street expectations on anticipated versus actual earnings. Nike was one of the first to start to manage expectations lower. Intel is also attempting to hold investors' hands through this round of earnings. A heathy correction on a fundamental basis may be in order. The only thing which argues against this is the continued influx of cash into mutual funds, which was reported to be above $US 15B last month. This type of cash inflow will support prices at higher levels, since funds have a defined investment amounts in their prospectus.

The major factor influencing the Canadian markets next week will be the Federal election Monday, June 2. A minority government could mean a lack of fiscal resolve, resulting in a decrease in international investor confidence in Canada's ability to wrestle its debt problems into submission. The Liberals have proven to be good fiscal stewards over the last 4 years in power, with the credibility developed by Finance Minister, Paul Martin, being a major reason for the success. If there is any concern that Mr. Martin will be unable to continue to manage the purse strings in an effective manner, look for a flight to quality to occur from the Canadian markets. For the US manufacturing orders, and US non-farm payrolls are to be the key numbers of focus, with some lesser numbers being cited if the market continues to lack any focus. The potential next week is for volatility. Good trading.

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