MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 12, 1998 (1)
KERM'S NOTE: Because I didn't provide coverage of market activity over the past few days, I am covering the Canadian markets for the past three day period, beginning with Wednesday.
WEDNESDAY CANADIAN MARKET OVERVIEW
Toronto Stocks End Slightly Lower On Earnings Reports
When the bulls are running on Wall Street, the momentum is usually enough to lift the Toronto stock market into positive territory. That didn't happen Wednesday.
Toronto stocks ended slightly lower on Wednesday on worry that earnings reports would disappoint and on slumping gold bullion prices due to persistent concern Japanese tax reforms would not go far enough to revive ailing Asian economies.
''It was a wrestling match between a positive bond environment and inflows of money from mutual funds versus earnings reports,'' said Jim Doak, president of Enterprise Capital Management Inc.
Also earlier in the day, ABC Funds portfolio manager Irwin Michael said ''The market's pretty light. It's an event market where you get news on a company and it triggers and it drags other companies up in the sector,''
''Gold's down, banks are down on profit-taking,'' Rolie Bradley of Maison Placements Canada Inc. said earlier in the trading day.
Gold eased in European spot trade on news that the yellow metal will make up 15 percent of the new European Central Bank's planned 39.5 billion Ecus (US$43 billion) reserves. The sell-off was attributed to disappointment that the ECB had not mentioned any freeze on central bank sales by European countries nor made clear how reserves would be managed. The bank also said members were free to chart their own course on future gold sales and were not constrained by the 15 percent level.
"They're still suffering from a hangover that doesn't seem to want to go away," said Fred Ketchen, senior vice-president at ScotiaMcLeod.
The hangover stems from the so-called Asian contagion, the widespread bank failures and currency devaluations that have hobbled many of Asia's economies since last fall.
Countries that are heavily dependent on natural resources, such as Canada, have endured volatile stock swings since then because of the perception they will be hurt by shrinking Asian demand for commodities.
The Toronto Stock Exchange 300 composite index fell 3.33 points to 7451.27, with gold and base metals miners cutting almost 10 points from the benchmark. About 104.8 million shares changed hands on the TSE, down from 117.6 million shares traded on Tuesday. Trading value was $1.929 billion. Declines outpaced gains 538 to 457 with 294 issues unchanged.
Seven of the 14 TSE 300 subgroups were up.
The top performer was the communications sector, up 0.72 per cent as Class B shares of Cinar Films gained $3.20 to $36.00. Cinar reported six-month earnings Wednesday of $8.8 million, up from $5.5 million. CanWest Global was up $1.05 at $25.00. The Winnipeg-based broadcaster said the sale of a 19 per cent interest in Australia's Network TEN boosted its quarterly earnings to $100.5 million, up $64.1 million from a year earlier.
Pipelines and utilities gained 0.69 per cent and 0.68 per cent respectively.
Bank stocks and other lenders rose as bond yields hovered near record lows. Newcourt Credit Group Inc. (NCT/TSE) climbed 95› to $73.75 and Canadian Imperial Bank of Commerce (cm/tse) rose $0.15 to $49.50. Power Financial Corp. (PWF/TSE), which includes Great-West Lifeco. Inc., Investors Group Inc. and The Pargesa Group among its subsidiaries, rose $1.45 to a record $36.45. Power Corp. (POW/TSE), the holding company for Power Financial, jumped $1.40 to a 52-week high of $36.75.
Seven of the 14 subgroups were down.
August COMEX gold fell $1.70 to $294.20, dragging Toronto's heavily weighted gold and precious metals subindex down 1.6 percent. Barrick Gold Corp. (ABX/TSE) slipped $0.30 to $27.80 and Placer Dome Inc. (PDG/TSE) fell $0.40 to $16.85 Franco Nevada lost $0.60 cents to $30.50, to $16.85. Meridian Gold closed at $4.00, down $0.25 cents as the price of bullion fell US$1.70 to US$293.30 an ounce on the Comex division of the New York Mercantile Exchange.
Among base metal miners, Inco Ltd. (N/TSE) fell 40› to $18.75, Noranda Inc. (NOR/TSE) fell 95› to $24.25 and Alcan Aluminium Ltd. (AL/TSE) fell 45› to $40.25.
The TSE paper and forest products index lost 0.48% and the oil and gas sector slipped 0.38% or 23,02 to 6111.72.. Among the sub-components of the oil & gas composite index, the integrated oil's fell 0.6% or 53.98 to 8480.35. The oil & gas producers fell 0.3% or 14.20 to 5438.89 and the oil & gas services lost 0.4% or 9.71 to 2347.25.
Northstar Energy, Petro-Canada, Probe Exploration, Gulf Canada Resources, Poco Petroleums, Canadian Natural Resources, Renaissance Energy, Bonavista Petroleum and Beau Canada Exploration were among the top 50 most active traded issues on the TSE. Oil & gas service issues were not represented.
Canadian Natural Resources gained $0.90 to $26.75 and Seven Seas Petroleum (u) $0.65 to $19.25.
On the flipside, Pioneer Natural Canada fell $1.50 to $34.50, Canadian Occidental Petroleum $1.05 to $30.35, Berkley Petroleum $0.80 to $12.00, Gulfstream Resources $0.70 to $3.85, Amber Energy $0.60 to $12.05 and Imperial Oil $0.55 to $25.70. Among service or oil related issues, Enerflex Systems fell $2.00 to $35.00, Ryan Energy $0.65 to $5.75 and Akiita Drilling $0.50 to $9.75.
Northern Telecom Ltd. (NTL/TSE) lost $0.75 to $84.25 as the company struggled to assuage investors' doubts that its purchase of Bay Networks Inc. last month for $7.27 billion will add value to the stock. "Northern Telecom is trying to convince the Street it's a good deal," said Andrew Martyn, a portfolio manager at Davis-Rea Ltd.
Newbridge Networks Corp. (NNC/TSE) rose $1 to $38 as some investors wagered the stock has farther to run in the near future. Options to buy Newbridge for $40 a share before July 18 soared 140% on trading of 145 contracts.
One of the biggest losers was in the industrial products sector. Geac Computer Corp. Ltd. (GAC/TSE) fell $7.15 to $42.85 in heavy trade after posting fourth quarter earnings that looked solid but failed to satisfy the market. Geac reported a fourth quarter profit of $0.82 a share versus $0.33 in the year-ago period but investors said a highly favorable tax rate was partly responsible. GEAC warned analysts in a morning conference call that next year it would like post lower earnings than expected. Some investors wre betting the stock will fall further. Put options to sell the stock at $42.50 jumped 178% on trading of 93 contracts.
Hyal Pharmaceutical Corp. (HPC/TSE) led the most actives, falling C$0.84 to C$1.89 as 4.14 million shares changed hands. The company issued a statement on Tuesday saying it was not sure why trade in its shares was so heavy.
Philip Services Corp. (PHV/TSE) dropped C$0.45 to C$5.15 after touching a new low of C$4.75. The Hamilton, Ontario-based scrap metal recycling firm said it had won approval for a $60 million credit draw.
Air Canada (AC/TSE) shed C$0.30 to C$12.90 with 1.2 million shares trading ahead of its June traffic report to be released on Friday and in tandem with lower share values in the U.S. transport sector.
Other noteworthy issues included Power Corp of Canada (POW/TSE), which rose C$1.40 to C$36.75 in moderate volume, and Inco Ltd. (N/TSE), which fell C$0.40 to C$18.75 in light volume.
Other Canadian markets were mixed. The Montreal Exchange portfolio fell 6.1 points, or 0.2%, to 3778.82. The Vancouver Stock Exchange gained 2.38 points, or 0.5%, to 530.37.
The Alberta Stock Exchange combined value index fell 0.44 to 2108.62. Declining issues outnumbered advancing issues 124 to 117 with anither 99 unchanged.
Among oil related issues, Colt Energy, Alta Pacific Capital, Sunfire Energy, First Star Energy, Wolverine Energy, Canop Worldwide, Tappit Resources, Anvil Resources and Ionic Energy were among the top25 most active issues on the ASE.
Red Sea Oil gained $0.15 to $1.75, Stellarton Energy $0.15 to $2.30, Petrofield Industries $0.12 to $0.40, BW Technologies $0.10 to $3.90, Progress Energy A $0.10 to $2.25 and Willow Creek $0.10 to $0.95.
On the downside, Underbalanced Drilling continued its slide, finishing down $0.25 to $1.25, Golden Trend Petroleum $0.20 to $0.30, Scarlet Exploration $0.13 to $0.72, Nycan Energy $0.12 to $0.63 and Cirque Energy $0.10 to $2.50.
The Canadian dollar trimmed some earlier losses to end North American trade a bit firmer around C$1.4715 (US$0.6796) on Wednesday, but received no strong support.
Trading was stuck in a tight band in the absence of news on the fundamentals front, and some corporate Canada buying interest capped moves to test the further downside of the Canadian dollar towards its record intra-day low of C$1.4754 (US$0.6778), hit on June 22, and the overseas trading low of C$1.4767 (US$0.6872), reached on June 16.
''It just stalled around the C$1.4740 (US$0.6784) level. We just saw corporate interest to sell some (U.S.) dollars up there,'' said one trader. ''I think it was a one-time transaction. They were looking to buy Canada.''
''The market was long U.S., looking to go through the C$1.4750 (US$0.6780) level, but just ran out of gas,'' he said.
On the chart, short-term stochastics data show U.S. dollars were slightly overbought against the Canadian unit. The U.S. dollar is well supported at C$1.4684 (US$0.6810), where the 21-day moving average is.
The U.S. currency eased, but stayed above 139 yen as yen buyers were unhappy with a lack of details in Japanese Prime Minister Hashimoto's pledge overnight to offer tax cuts through structural reform next year.
The market may have been expecting too much too quickly.
In Japan, the process of gaining consensus in political and bureaucratic circles takes time. Without technical support from the Finance Ministry officials who actually write details of tax reform, the prime minister cannot announce details.
It is still unclear how the government will be able to finance permanent, as opposed to stop-gap, income and business tax cuts big enough to boost consumer spending when its fiscal deficit is on the rise. In addition, a tax system overhaul may not result in a net tax cut as the reforms under deliberation would result in a broadening of the taxation base.
In cross trading, the Canadian unit edged up to 1.2354 marks from 1.2318 marks at the previous close here, and to 94.68 yen from 94.16 yen as the German and Japanese currencies fell against the U.S. dollar.
There is no major economic indicator release that could affect the market until Friday, when Canada's June jobs data and U.S. June producer price index are released.
Economists on average forecast the Canadian jobless rate at 8.4 percent, unchanged from May. Employment is expected to increase by 26,000 after falling by 7,300 in May, which came in contrast to a sharp gain in April. General Motors plant shutdowns and construction strikes in Ontario are expected to be a drag on employment.
The U.S. June PPI is forecast to be unchanged after a 0.2-percent rise in May. The core rate, excluding food and energy prices, is seen rising 0.1 percent after a 0.2-percent rise.
Debate on Japanese tax reform by government and ruling party advisory panels will not resume until after the July 12 Upper House elections.
These councils usually end their debates with specific proposals by year end, in time for parliamentary discussions between January and March for the new fiscal year starting on April 1.
Concern over Russia's financial health and Japan's recession are providing fresh safe-haven buying of the U.S. dollar, which puts downward pressure on the Canadian dollar.
''There's still uncertainty in Asia and Russia. It's a U.S. dollar buy story,'' said Reid Farrill, executive director, foreign exchange, at CIBC Wood Gundy Securities. ''Natural Canadian dollar buyers are not there.''
Canadian bonds ended flat to weaker in sympathy with U.S. bonds on Wednesday after staging a rally in the long end of the yield curve on Tuesday.
U.S. treasuries drifted lower in thin trading as the U.S. dollar gave up some earlier gains against the yen. In earlier trade, U.S. bonds were steady in tandem with a rise in the U.S. dollar against key currencies after the market sold yen because of a lack of details in Japanese Prime Minister Hashimoto's pledge to offer tax cuts through structural reform next year.
As players took profits, Canada's benchmark 30-year bond fell C$0.41 to C$136.88, yielding 5.450 percent. On the chart, it has support at C$136.49, and below that, at C$135.74.
''I think the market is kind of tired right now, just wants to take a bit of a rest,'' said Sheldon Dong, manager of fixed-income research at Midland Walwyn Capital Inc. ''It's technical trading right now. Canada broke new highs yesterday and the U.S. did not do anything. Not a lot of follow-through.''
On Tuesday here, Canada's 30-year bond surged on speculative buying, pushing down its yield to a record low of 5.421 percent
The U.S. 30-year bond fell 11/32 to yield 5.62 percent after initial gains. The spread between the two was 17 basis points after 18 points at the previous close here.
''Yesterday Canadian bonds drifted to a record low (in yield), so it's hard to say that a lower Canadian dollar is leading to a sharp restraint on Canadian bond performance,'' said Harvinder Kalirai, economist at I.D.E.A. in New York.
''We outperformed yesterday, but the general trend is towards underperformance versus the U.S. I don't necessarily think that's because of the Canadian dollar,'' he said.
Dollar/yen moves, reflecting rising and fading hopes of Japanese action to boost the economy, are seen stuck in a tight range. This will also leave North American bonds in narrow bands for a while.
Japan's Prime Minister Hashimoto, desperate to survive the weekend Upper House election, offered overnight a tax cut through structural reform next year, without giving details.
It is unclear how the government will be able to finance permanent, as opposed to stop-gap ,income and business tax cuts big enough to boost consumer spending while its fiscal deficit is on the rise. In addition, an overhaul of the tax system may not result in a net tax cut as the reform under deliberation would result in a broadening of a taxation base.
Debate on Japanese tax reform by government and ruling party advisory panels will not resume until after the July 12 Upper House elections.
These councils usually end their debates with specific proposals by year end, in time for parliamentary discussions between January and March for the new fiscal year starting on April 1.
There are no major economic indicator releases that could affect the market until Friday, when Canada's June jobs data and the U.S. June producer price index are due for release.
Economists on average forecast the jobless rate at 8.4 percent, unchanged from May. Employment is expected to show an increase of 26,000 after falling by 7,300 in May. There was a sharp gain in April. General Motors plant shutdowns and Ontario construction strikes are expected to be a drag on employment.
The U.S. June PPI is forecast to be unchanged after a 0.2% rise in May. The core rate, excluding food and energy prices, is seen rising 0.1 percent after a 0.2-percent rise.
The money market was little changed in quiet trading.
Canada's three-month when issued T-bill traded with a yield of 4.81 percent, compared with 4.82 percent at the previous close here.
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