Weekly Wrap-Up November 10-14, 1997

Closing Numbers

The North American bond markets pushed into record low territory on a holiday shortened trading session. Remembrance Day in Canada, and Veterans Day in the US, closed the fixed income markets Tuesday. The continued uncertainty with respect to Southeast Asia, and Latin America, is driving investors into the relative stability of bonds. Wednesday's FOMC meeting saw the Fed Chairman, Alan Greenspan leave US short-term interest rates unchanged. No action by the Fed had been widely anticipated by the markets. More important to the markets was Mr. Greenspan's comments before the House of Representatives on Thursday. While Mr. Greenspan gave away little in the way of insight into the near-term actions of the Fed, he did comment on the Southeast Asian situation. The volatility of the world markets, and the devaluation of currencies in the Asian region may provide the impetus for a natural slow down in the US economy, decreasing the need for Fed action vis-a-vis short-term interest rates. One question remains, with no signs of inflation on the domestic front, and Asian imports becoming cheaper by the minute, is anyone else thinking of the potential deflationary effects to the economy which may emerge? Just thought I would ask.

Economic data released on the week continues to show a growing economy with little signs of inflation. In Canada, new vehicle sales for September declined 3.3%, while housing starts rose 3.4% on an annualized basis. The US released data indicating that non-farm productivity rose at an annualized rate of 4.5% in the third quarter. As well, retail sales declined 0.2%, but with autos removed the same data revealed that sales were up 0.4%. The US PPI data released Friday showed an increase of 0.1%, with the core rate, which excludes food and energy products, remaining unchanged. The economic data had little influence on the bond markets, as the volatility in the equity markets continues to drive investors to the relative safety of fixed income securities.

On the week, the Canadian 30 year bond improved 7 basis points to close below 6% for the first time since the Government of Canada began issuing the bond in 1990. The Canadian long bond finished at a yield of 5.96%, after pushing as low as 5.92% in interday trading. The weakness in the Canadian dollar prevented the Canada bonds from hanging onto all of their earlier gains. The US market felt the jitters of the volatile equity markets, as well as the deteriorating situation in Iraq, and concerns that the Japanese institutional investor may have to sell $US assets to bolster trouble balance sheets at home. In the face of all this market turmoil the US long bond managed to hang onto a 7 basis point improvement, closing the week at 6.10%. The Canada/US 30 year spread remains unchanged at -14 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets continued to be influenced by activity in the Southeast Asian markets. Concerns over economic slowdowns in the Asian economies, and the subsequent impact on the earnings of North American firms hurt share prices again this week. With the levels which the Nikkei is now trading at there are concerns over the stability of the Japanese financial industry. Many firms which hold the stocks of other firms on their balance sheet as assets are finding that at the Nikkei's present levels their balance sheets are looking particularly unhealthy. This may cause the liquidation of US assets by Japanese institutional investors in order to bolster the balance sheet. Can you say "Window Dressing"? The situation in Iraq is also contributing to the uncertainty in the market place. US President Clinton added to the volatility by ordering another aircraft carrier into the Persian Gulf.. The British are also sending warships into the region. With the arrival of a second US carrier, the US will have as many warplanes in the area as make up Iraq's whole air force.

The markets were volatile again this week, showing every indication that a new range is being established, and the possibility of new highs being set in the near-term becoming unlikely. The TSE was hurt substantially again this week by the continued underperformance of the gold sector. Bullion put in a 12 year low close Friday at $US 303.70. This gave the gold sector little to cheer about. The TSE closed the week down 1.83%, or 125.56 points, at 6726.18. The DJIA closed the week with a small loss of 8.84 points, at 7572.48. Given the recent rough ride that the markets have been experiencing, many investors must feel that such a small loss is as good as a gain. The rest of the major exchanges in North America closed the week mixed to lower.

Next week brings a host of economic data including US industrial production, CPI, and housing starts. Even if the data is strong, do not expect the Fed to step in and raise interest rates. If they do, the $US will strengthen, causing the Southeast Asian countries to raise rates to defend their currencies, further damaging the growth prospects of the region, and pushing the global economy towards deflation. The Japanese economy is in such bad shape that a Fed interest rate raise could kill it. Look for potential action out of the Bank of Canada, as the Canadian dollar is getting to such low levels versus the $US, that Governor Thiessen may have to raise rates to defend the currency. Good trading.

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