Weekly Wrap-Up May 5-9, 1997

Closing Numbers

With little in the way of significant numbers released on the week, the bond markets could concentrate on the fundamental issue of supply, and digesting that supply. The issuance calender was heavy this week, with the US Treasury issuing $US 17B 3 years, Tuesday, and $US 12B 10 years, Wednesday. The Bank of Canada also came to market with an additional $CDA 2.4B re-opening of the 7.25%/07, 10 year issue on Wednesday. A distinct lack of conviction of behalf of the bond markets meant for particularly sloppy auctions. The US 3 year issue had a poor 1.86:1 bid to cover ratio, while the US 10 year did little better with a 2.08:1 cover ratio. Given the lack of interest demonstrated by investors for the US auctions, the Bank of Canada was fortunate to survive without a failed auction. The Canadian 10 year issue was excessively nasty with a 4 basis point tail to the auction. Once the market had digested the supply, with a good deal of it sitting on dealers books, US initial jobless claims rose, providing market participants with the insight that the US economy is not running ahead of itself. Ergo, the Fed may not raise rates on May, 20. Mr. Greenspan complicated matters by stating that 1997 is not 1994, referring to the 7 rate increases undertaken by the Fed the last time inflationary concerns raised eyebrows. A very ambiguous statement. Does the Fed need to raise rates May, 20? Or will there be fewer hikes during this cycle of rate increases? The comments are clear as mud.

The churning of the North American bond markets left investors with little insight into the direction the markets are poised to move. The US 30 year treasury issue closed unchanged on the week at 7.89%. The Government of Canada 30 year bond added 4 basis points, over a choppy week, to close at 7.11%. The Canada/US 30 year spread moved wider to close the week at 22 basis points.(A basis point is 1/100th of a percentage point.) For investors in Canadian provincial bonds, it is of note that Moody's rating agency has downgraded the Province of British Columbia's debt. The move comes as a result of the B.C. government's increased program spending, deteriorating deficit situation, and lack-luster economic prospects over the medium term. The down grade announcement did little to B.C. spreads, relative to Canadian government bonds, as the majority of the news has already been priced into the market.

The equity markets of North America continued their bullish behaviour established in mid-April. New record closes were set by the DJIA, the S&P 500, and the Nasdaq this week as a broad based rally continues. The strength exhibited early in the week was tempered by the poor performance demonstrated by the respective bond auctions. Once the supply had hit the street, equities regained some of their lost ground. The big news for the TSE was the continuing saga of Bre-X, which opened, halted and was de-listed by the Toronto exchange this week on news of the magnitude of the testing errors, and economic estimates of its Busang gold property. Opening for trading on Tuesday, Bre-X was well bid at $CDA 0.09, after trading above $CDA 28.00 per share, in the fall of 1996. Investors are said to be trying to pick up share certificates to use as wallpaper.

The Toronto market was helped, by and large, by gold stocks. The banks also added to gains, but the broader market was well represented in the 2.01% increase, 122.61 points, in the TSE. The US markets were higher on the week, with a broad cross section of stocks participating in the rally. Adding 98.33 points, 1.39%, the Dow benefited from US long term interest rates remaining below 7%. At 7%, conservative investors tend to move out of the equity markets, and into the bond market.

Next week brings some heavy numbers to the markets including retail sales, three Fed surveys, PPI, CPI, industrial production, and housing starts. To add to the potential volatility of the markets US equity options expire next Friday, as well. All this is the precursor to the Fed FOMC meeting May, 20. Good trading.

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