Weekly Wrap-Up September 28 - October 2, 1998

Closing Numbers

The North American bond markets continue to post record low yields. Emotions currently supercede any fundamentals, and investors are looking for a safe haven to park capital in the face of increasingly volatile and bearish equity markets. The big news on the week was the Federal Reserve Board meeting of the FOMC. Mr. Greenspan and Co. reduced US short-term interest rates 25 basis points, as expected. However, for some reason the equity markets felt that the Fed Chairman would lower rates further, and instead of showing signs of approval, sold off signaling that the market felt the move was too small.

For anyone who has followed the current Fed Chairman's style, would remember that 13 of the last 14 Fed interest rate moves have been 25 basis points. Mr. Greenspan has proven himself a gradualist, who wants calm predictable markets. Unfortunately, Bank of Canada Governor Gordon Thiessen is not as predictable. Mr. Thiessen cut rates, but it took 70 minutes for him to do so. Many felt he would either follow the Fed immediately, or wait until the traditional 8:55 - 9:00 am window for any action. With the delay the Bank of Canada introduced confusion into the market place which hints at a lack of policy conviction. As a result, the $CDA was hammered throughout the remainder of the week.

The Asian markets continue to experience the emotionally driven weakness, which is adding to the bond markets rally. This continued last week as the banking reform that was put together continues to meet with resistance. The fact that the New York Fed organized a bailout package for Long Term Capital Management has some Japanese officials asking why they have to move to correct their systemic financial problems. If the US doesn't why should the Japanese is the question being asked.

Latin America remains perched precariously on the precipice of collapse as many market commentators are calling for the IMF to step in and help Brazil, Venezuela, and Argentina restructure their respective debt burdens. As for Brazil, the presidential election will be decided Sunday with current President Cordoso expected to be re-elected on a program of austerity and financial reform. Any economic reform, or fiscal re-alignment, will not likely be witnessed until after the gubernational run-off at the end of October.

The economic numbers were once again irrelevant to the market as emotion continues to rule. In Canada, the industrial producers prices rose 0.5% in August: raw materials dropped 0.7%; GDP declined 0.3% in July - the 4 contraction in as many months; department store sales declined 1.7% in August month-over-month and rose 2.7% year-over-year. In the US, consumer confidence dropped 7.1 points to 126 in September; new home sales for August dropped 4.4%, leading indicators for August were unchanged; national purchasing managers association index was unchanged at 49.4; construction spending rose 0.1%; non-farm payrolls rose 69,000 jobs (195,000 expected - August number revised down) for an unemployment rate of 4.6%. The US non-farm payrolls number indicates that the manufacturing sector is slowing, as well as the service sector.

The Canadian 30 year long bond finished the week at 5.30%, shedding 7 basis points. The US 30 year Treasury bond closed the week at 4.84%, a rally of 28 basis points. The Canada/US long bond spread has moved out to 46 basis points. Liquidity in anything but the benchmark government bonds is drying up, and this will only be exacerbated by the October 31 year-end of the major Canadian banks. Look for corporate bond spreads to move wider. (A basis point is 1/100th of a percent.)

The North American equity markets were unable to hold any kind of bid for long this week as investors are looking to get out of anything which may have exposure to hedge funds. The financial sector and the high tech sector took it on the chin last week. Companies which were once sought out due to the international diversification of their client base and cashflows are now being shunned for the same reasons. What investors once viewed as being a very positive attribute of a corporations business plan is now considered to be an overwhelming negative.

The FOMC rate cut was considered too small to rescue the equity markets and caused the market to dig itself a deep whole and jump in. One market analyst indicated that even though borrowing costs are going down, sales will not necessarily grow as a result. The TSE closed the week at 5517.13, down 329.59 points or 5.64%. The DJIA closed down 244.08 points, or 3.04%, at 7784.69. The S&P500 shed 4.03%, while the Nasdaq was down 7.38%. The markets will continue to trade on an emotional basis. Watch for the usual suspects - Asia, Russia, Latin America - to be augmented by impeachment proceedings in the US and military tensions in Serbia. Good trading.

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