Weekly Wrap-Up October 20-24, 1997

Closing Numbers

The North American bond markets started the week with little in the way of economic indicators, or market sentiment for direction, the Far East situation changed all that. Any activity early in the week was attributed to position squaring, and short covering. 'Fed Speak' was prevalent Tuesday, as three prominent Federal Reserve Bank members spoke. San Francisco Fed President, Robert Parry indicated that the US economy is in a good position, and inflation remains well behaved. Richmond Fed President, Alfred Broadhus stated that the favourable situation in the US economy may continue for some time, but he was doubtful it can continue indefinitely. Fed Vice-Chair, Alice Rivlin, said that the central bank must be on guard to protect the economy from overheating. The market could take little from these comments, and it is more concerned about Fed Chairman Alan Greenspan's comments to the Congress October 29, next Wednesday.

All of these comments did little to influence the market. However, the averted currency crisis, and subsequent equity market meltdown in Hong Kong saw a distinct flight to quality. That quality is the North American bond market. As investors dumped equities worldwide, a safe, liquid haven for the funds was found in North America. As well, on a macroeconomic level, imported Asian products just became less expensive, mitigating domestic inflation and decreasing the likelihood of a Fed increase in interest rates in the near-term.

As indicated, there was little in the way of significant economic data out this week. The US released the trade gap, federal deficit figures and unemployment claims. All provided little insight into the strength of the economy. In Canada, wholesale trade declined 0.6%, as housing related activity slowed, merchandise trade saw the current account surplus decline to +$CDA 1.39bil, from 1.8bil (1.9bil expected), with imports rising to record levels. Canadian CPI data released during the week indicates that inflation in Canada is subdued, declining 0.1% in September to an annualized rate of 1.6%. Supply came to the Canadian market as Mexico issued $CDA 500mil 6 year Global issue at +175 basis points to the Government of Canada 7.5%/2003. The issue was well received by domestic retail clients, however institutional clients felt that the 175 basis point pick-up over Canadas was not enough. It is interesting to note that the Mexican issue is the first of what is generally thought to be many global issues denominated in $CDA. As government borrowing requirements decrease, and fiscal restraint continues to be the budgetary directive of the domestic governments, there is likely to be a 'squeezing in' of both corporate and foreign sovereign issuers to replace the domestic appetite for interest bearing products. The Government of Canada also announced a $CDA 1.2bil re-opening of the 8%/2027, scheduled for next week. That will bring the outstanding float to $CDA 9.6bil.

The Canadian long bond shed 14 basis points to close the week at 6.18%, underperforming the US market by 2 basis points. The US Treasury 30 year bond closed the week at 6.28%, down from 6.44% last Friday. The majority of the rally was fueled by both domestic and international clients looking for a safe haven for funds as money came out of the equity markets around the world. (A basis point is 1/100th of a percent.)

The North American equity markets faced a number of pressures, not the least of which was the melt down which occurred in the Far East. Thursday, the Hang Seng index shed 10.4% of its value as a perceived threat of the Hong Kong dollar coming under pressure forced domestic banking interests to raise short-term interest rates 300 basis points. This caused a sell-off based on the future economic prospects for the region under an increased interest rate environment. The selling pressure did not stop in the Asian markets, but rather spilled over into London, and North America. What had started out as positive week for the equity markets based on fundamentals and respectable Q3 earnings reports, ended in a selling spree.

Adding to the injured markets decline was a recommendation of Swiss banking representatives for the Swiss central bank to reduce reserve holdings of gold by 50%. If undertaken, this move would put an additional 1400 tonnes of gold on the markets. Gold lost $US 17, or 5.24% on the week, $US 14.70 on Friday alone. The current global economic picture does not bode well for the precious metal. Central banks are reducing the reserve holdings of the yellow metal, while industrial demand for the product remains strong. With so much of the metal available, there is little reason for the price to rise in the near-term.

Once the dust had settled the North American markets had held in fairly well. The TSE lost 3.01 points on the week, to close at 7033.49. The DJIA lost 1.68%, or 131.62 points - roughly equivalent to Friday's move, to close the week at 7715.41. The S&P 500 lost 2.52 points, and the Nasdaq lost 15.93 points, both less than 1 %. Small and Mid cap firms are holding their value, as they are more dependant on the domestic economy than the fluctuations of the international markets.

Next week brings some interesting economic data to the US market and supply to both Canada and the US. Existing home sales, employment cost index, durable goods orders, new home sales, Q3 GDP, and Chicago PMI numbers. As well, Federal Reserve Chairman Allan Greenspan will address Congress, Wednesday. There is a lot of noise out there, searching out the right signal will be tricky. Good trading.

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