Weekly Wrap-Up October 26-30, 1998

Closing Numbers

The North American bond markets had a relatively quiet week, as investors had to digest supply in the US and the Canadian market dried up ahead of the banking sector's year end. With the Federal Reserve Board having cut interest rates twice in the last month, the feeling is that another rate cut will be some time off.

The US market faced $US 38 billion in supply this week, which was taken down well by investors. Canadian banks face a regulated October 31 year end. As a result, the dealers were reluctant to take too many assets onto their books over the course of the week. Thin markets, easily moved by medium sized deals were the norm over the week. It is worth noting that the corporate bond markets are beginning to show some signs of life, with an Imasco deal selling well in Canada, and spreads moving tighter in both Canada and the US. This is probably related to the recent strength being demonstrated by the equity markets, rather than a return to the heady days of April of this year.

The economic data that was released this week may have actually had an influence on the markets. The flight to quality trade motivated by fear is slowly giving way to economic fundementals. This will continue until Brazil devalues the real, or the Russian economy leads to drastic political change. In the US consumer confidence fell 7.2% in October; durable goods order rose 0.9%, up 4% ex-transportation; initial claims declined 18,000; employment cost index rose 1% in the third quarter; new home sales dropped 1% in September; chain-weighted price index rose 0.8%; Chicago purchasing managers index dropped below 50 (the level at which the economy is said to be expanding) to 48.1; advanced third quarter GDP rose a larger than expected 3.3%. In Canada the industrial products price index declined 0.6% in September, with raw materials rising 1.6%; number of employees reported in August was unchanged; weekly earnings rose 1.5% on a tear-over-year basis; hours worked remained unchanged; GDP at factor cost rose 0.7%. The GDP rise is the first increase in four months. However, many economists are predicting a continued slowdown of output in Canada.

The Canadian 30 year long bond added 1 basis point in yield to close the week at 5.50%. While the week was somewhat more interesting than the final numbers indicate as the Government of Canada issued debt in French Francs, Sterling and US dollars over the week. All the deals were very well received. The US Treasury 30 year bond closed the week down 2 basis points at 5.15%. The US market continues to outperform the Canadian bond market, with the Canada/US long bond spread moving 3 basis points wider to 35 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets continue to claw their way back from the edge of the abyss. Better than expected earnings have been reported by major firms, fueling the drive off the bottom. As well, mergers and acquisitions are adding to the excitement as cash rich firms look to pick up undervalued companies which compliment their current business line.

In Canada, three reasonable size deals were announced this week which put a bid into the market. Empire announced its decision to purchase Oshawa Group; Loblaws announced its intention to by Provigo in Quebec; and Torstar announced an unsolicited bid for Sun Media. Consolidation of the food distribution network is occuring with the first two deals, while the latter raises concerns over the delivery of independent news in an ever increasingly consolidated industry.

As a result of the better than expected earnings reported by several large Canadian companies, the merger activity and stronger than anticipated GDP numbers, the TSE managed to outperform its southern neighbours on the week (A rare occurance this year.) The Toronto Exchange added 6.27%, or 366.30 points to close well above 6000, at 6208.28. The DJIA managed to add 139.81 points, or 1.65%, to close the week up at 8592.10. The S&P 500 added 2.62%, while the Nasdaq was up 4.58%.

Next week brings the start of a new month, and in the Canadian banking community a new fiscal year. Coming on the economic front, the US non-farm payrolls number and Canadian unemployment figues will be released. On the international front watch to see if Russia, China or Brazil gets into any more trouble. Many strategists believe we are in the eye of the storm. Good trading.

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