Weekly Wrap-Up August 31 - September 4, 1998

Closing Numbers

The North American bond markets outperformed other asset classes on the week as the 'flight-to-quality' trade continues to emerge as the trade of choice. The Canadian market also benefitted from profit taking in the US currency market, allowing the Canadian dollar to show some signs of life as the Yen and Deutschemark also strengthened. Global market turmoil continues to allow the bond markets to hold in where the equity markets are getting beaten back.

Malaysia froze its exchange rate, preventing any convertibility for speculation purposes. The Bundesbank did not reduce its target repo rate, equivalent to the Bank of Canada overnight rate or the Fed Funds rate, which had been widely called for by market observers. Latin America continues to feel the curse of the global melt-down as Moodys rating agency downgraded Brazilian and Venezuelan foreign currency denominated debt. The move from B2 to B1 leaves the debt in the non-investment grade category, but does little for investor confidence in the current economic and fiscal situation in the southern hemisphere.

On the economic front in North America little was made again this week of the economic data, as the markets continue to trade emotionally. In the US, new home sales declined 1.6% on an annualized basis; nation association of purchasing managers index rose 0.3 to 49.4 in August; construction spending rose 0.4% year-over-year in July; leading indicators (which aren't) rose 0.4% in July; factory orders rose 1.2% in July; productivity in the second quarter was revised up 0.3 to +0.1%; same store sales rose 3.5% year-over-year compared to 4.8% in July and 5.6% in August 1997; non-farm payrolls came out as expected at +365,000, leaving the unemployment rate at 4.5%. In Canada, second quarter GDP rose 0.4%; the implicit price index rose 0.3% over the second quarter; GDP at factor cost fro June was -0.1%; help wanted index was unchanged in August at 144; unemployment slipped 0.1% to 8.3%, primarily due to a 56,000 job increase in the self-employed component.

The Selling frenzy of the previous week reversed itself as many investors felt that the weakening US dollar was a buying opportunity in the peripheral markets beat up recently by the world's desire to own US dollar denominated securities. The Government of Canada 30 year bond shed 20 basis points over the week, closing at 5.61%. The US 20 year Treasury bond finished the week stronger by 5 basis points, at 5.29%, as weakness in the equity markets allowed the bond to do better, but technical resistance at the 5.25% level prevented any further gains. (A basis point is 1/100th of a percent.)

The North American equity markets all felt the effects of the global turmoil. The summer rally which started in June and petered out in July had been limited primarily to the large cap, 'blue chip' stocks. This type of thinly based rally is particularly susceptible to a 'correction' as investors look to the most liquid stocks in their portfolios to sell in the face of declining markets. This occurred over the week. Concerns over the financial community's exposure to emerging market debt and derivatives has taken the bid out of the market for bank stocks. The commodity based securities have benefitted over the week from an increase in commodity prices, particularly gold and oil, as profit takers in US currency markets looked for other venues to park their cash.

The TSE benefitted from the boost in commodity prices and strengthening Canadian dollar, regardless of how temporary, significantly outperforming its southern neighbours. While the TSE finished underwater on the week and experienced a substantial amount of volatility, it was stronger by far than the US. The TSE lost 23.80 points, or 0.41%, to close at 5742.51. The DJIA had a rough week closing down substantially at 7640.25, a decline of 411.43 points, or 5.11%. The Nasdaq shed 4.46%, while the S&P500 lost 5.18%. The markets are week and looking to Fed Chairman Alan Greenspan comments Friday night to give the market some guidance. Any mention of an ease will give the market some support.

International events are still going to weigh heavy on the markets. The situation in Asia is going to get worse. Russia remains a country with out a government, and there is some concern that the political vacuum will continue - this could force the country into an economic dictatorship in an effort to prevent the riots that plagued Indonesia. Latin America and other commodity based economies are not out of the woods yet as there is little indication that there will be a pick-up in demand for the base metals, minerals, lumber or agricultural goods.

Next week is a short week due to the Labour Day holiday Monday in both the US and Canada, so anything next week will occur in a holiday shortened session. The markets also had an early close Friday as a result of the long weekend, and many traders Thursday night were looking forward to the rest. Some were even hoping for month end. There is still a lot of volatility present in the markets, and the financial sector could be in for a rough ride as derivative positions catch up with the dealers. While the P/E ratios have dropped dramatically over the past several weeks in North America, one salient question remains - Are the current valuations using the appropriate earnings stream going forward? Good trading.

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