Weekly Wrap-Up September 7-11, 1998

Closing Numbers

The North American bond markets rallied over the holiday shortened week, as investors sought a safe haven for their capital. Turmoil in Russia, Asia, Latin America, and potentially the US, are adding to concerns over the health of the global markets.

Internationally, this week saw the Bank of Japan attempt to increase consumer and corporate borrowing by lowering the overnight interest rate to 25 basis points from 50 basis points. This will do little to spur investors into returning to the spending levels required to lift the economy out of its deepening recession. The Japanese government must face the possibility that the economy has entered a liquidity trap, whereby no level of interest rates will spur consumer demand. Savings levels in Japan are almost none-existent, consumer confidence is low, and unemployment is rising as the consumer disappears both domestically and internationally. This may be a move to attempt to re-inflate the global economy. Watch for any statements from the G-7 regarding monetary policy, or action by central banks moving to more accommodative monetary positions.

The Russian Duma rejected President Yeltsin's choice for Prime Minister a second time resulting in the President backing down from his position. It would appear that a somewhat more communistic planned economy will emerge from the ashes of Yeltsin's declining power base. The Russia is still effectively without a government as the halls of power a a-buzz with deal making and political intrigue. Look for several members of the Communist Party to occupy positions of economic power in any new Cabinet that may be formed. German banks are going to be out a lot of money as a result.

The Starr report caused the American markets to behave poorly, just as the President has. Concern exists that the information contained in the Starr report will eventually lead to a Presidential impeachment. However, with Congressional elections coming in November, it would be politically unwise for the Republicans to call for such a move as it will lead to sympathy for the Democrats. If Vice President Gore becomes President as a result of an impeachment, the Republicans are likely to be hurt by the image of Gore - squeaky clean - and the image of the witch hunt to prove President Clinton had an extra-marital affair. With the report released look for the markets to stabilize as a certain amount of the political uncertainty has been removed from the markets.

On the economic front, the US second quarter current account deficit increased a record $US 9.79billion; consumer credit rose $US 5.3billion to $US1.267 trillion in July; wholesale inventories rose 0.3% in July; PPI fell 0.4% in August, with the core dropping 0.1%. The Canadian numbers this week included second quarter capacity utilization down 0.1 to 8.56%; housing starts rose 11.7% in August on an annualized basis; new house price index rose 0.1 to 100.2 on a month-over-month; new motor vehicle sales declined 0.5% in July. The markets are trading in too emotional a state for any one to notice economic data. The Canada/US 30 year long bond spread narrowed in 7 basis points to +25 basis points. (A basis point is 1/100th of a percent.)

The North American equity markets continued their volatile gyrations over the holiday shortened week. Commodity price stabilization, and slight short lived improvement, lent the Canadain market some support. Additional strength was added by the improving Canadain dollar. Banks, and financial companies benefitted from Federal Reserve Board Chairman Alan Greenspan comments relating the potential need for a decrease in interest rates if the US economy experiences the effects of the global slow down.

Gains in this sector were mitigated by the announcement of the Fuji Bank write-downs related to equity derivatives losses, and bad loans. In the US, Lehman Securities denied the rumour that it would file for Chapter 11 bankruptcy protection, but did indicate that there would be significant losses associated with emerging market trading operations. Gold and oil stocks did better on the fleeting rise in commodity prices.

The TSE added 146.93 points on the week, closing at 5889.44, up 2.56%. The DJIA rose 2.03%, or 155.25 points, to close the week at 7795.50. The S&P500 added 3.61% and the Nasdaq was boosted 4.80% on increased earnings at Intel. A little sell the rumour, buy the news, action occurred as traders indicated that the Starr report contained nothing significantly different than what was expected. This gave the market a bid into the close Friday, and provided the impetuous for the positive numbers seen in the market this week.

There is still a significant amount of uncertainty in the markets. While many believe that a large portion of the danger is behind us, there are still many unknowns which are potentially market destabilizing. Reaction to the Starr report, Russia's government unrest, and the deepening recession in Asia are only some of the issues to be contended with next week. Good trading.

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