Weekly Wrap-Up September 22-26, 1997

Closing Numbers

The North American bond markets posted lower yields by the week's end, but had a volatile ride getting there. The influx of supply in both the Canadian and US markets saw dealers working hard to frame the yield curve, in order to make the new issues look attractive to investors. The US Treasury issued $US 15.5bil 2 year notes Tuesday. This was the first issue that was deemed 'stippable' by the Treasury. As a result of the 'strippable' feature, demand for the 2 year was expected to be strong. The buyers did not materialize as expected and the auction was weaker than anticipated. This left the market weak, with supply sitting on the dealers books. Not a good situation for the $US 11.5bil 5 year auction Wednesday. As is usually the case, a bad 2 year sets up a good 5 year. The 5 year auction was strong, as demand re-materialized. Along with the US Government debt, the Canadian curve was faced with Provincial and corporate supply.

The Province of Nova Scotia came to market with $CDA 300mil 6.6% 2027 bonds, which were well received. As well, Prince Edward Island came to the markets with a $CDA 35mil 10 year issue, which found buyers. Of interest in the corporate market was the Air Canada issue of $CDA 230mil 7.25% 2007, at 156 basis points back of the Canada curve. The Bank of Canada paraded one of its deputies out in front of the markets this week with a little bank speak. Deputy Governor Sheryl Kennedy indicated that the Bank of Canada is committed to keeping inflation in check, adding that the Bank is forward looking, not reactionary. All the supply was knocked around by the economic releases on the week

US durable goods orders rose 2.7% month over month, with 1% expected. This is the third monthly increase for orders of big ticket items. US first time unemployment claims dropped 2000, and US August existing home sales rose 3.3%. The only economic release in the US which stemmed the signs of inflation was the final revision to Q2 GDP, which was revised down to 3.3% from 3.6%, with the price delator - a measure of inflation - measuring a mere 1.8%. The Canadian industrial producer price index measured inflation at the producer level at 0.9% year over year, indicating there is little reason for the Bank of Canada to move at present, except to bolster the currency.

The Canadian 30 year bond finished the week at 6.28%, 6 basis points stronger than last week, the lowest yield for a weekly close since the Government of Canada started to issue long bonds in 1990. The Canada 30 year bond posted a low close during the week of 6.25%. The US Treasury 30 year bond finished the week yielding 6.34%, 4 basis points stronger than the previous Friday close. The trading was choppy through out the week, as technically the market is at the high end of its recent range, and the US long bond has failed to break through significant resistance levels in both the cash and futures markets. The Canada/US 30 year spread finished the week solidly in negative territory, posting -6 basis point close. (A basis point is 1/100th of a percent.)

The North American equity markets chopped around, with little sense of purpose, all of them closing the week within 7 points from where they opened. Repositioning of equity portfolios, profit taking, and concern over Q3 earnings reports continued to haunt the equity markets. The lack of real focus saw the markets chop around. The Nasdaq managed to post two record closes early in the week, while the TSE added its 35th record close on Monday. There was little else to cheer about on the week. Talk of small caps, and cyclicals - such as metals- coming back into favour may be a sign that market experts are beginning to see the end of the strong bull market.

The TSE closed the week at 6975.88, down 6.82 points on the week. The DJIA shed 4.91 points to close at 7922.18. The Dow traded above 8000 this week, but was unable to hold onto the gains to post a close back in that territory. The Nasdaq was the only major North American exchange to post a gain on the week, rising 1.80 points. The market may just be digesting the recent gains, and re-evaluating the earnings forecasts which the analysts have been forecasting. A little breather would be healthy for the markets.

Next week brings the ever important FOMC meeting. It is widely anticipated that the Fed Chairman, Alan Greenspan will leave the short-term rates in the US unchanged at 5.50%. In the US, construction spending, the NAPM survey, factory orders, a supply announcement, and the non-farm payroll number will also add to the fray. The bond markets are overbought on a technical basis, trading at the high end of the recent range. A failure by the US long bond to break through technical resistance will make the market vulnerable to the downside. Good trading.

Weekly Wrap-Up Archives

The Markets Page

The Financial Pipeline Homepage