CLOSING MARKETS FOR THURSDAY, OCTOBER 1, 1998
Canada
Gold The Only Glimmer Of Hope In Bay Street Retreat
A razor-sharp cycle of falling stocks and mounting fears continued hacking away at economic confidence Thursday as plunging North American markets spiralled toward new 1998 lows. Bay Street hurtled lower in tandem with Wall Street again in yesterday's worldwide retreat, and only a surge in the price of gold preventing Toronto's key index from falling further.
In the absence of good news, losses on North American markets have been weighing down their European and Asian counterparts, which in turn hamper the next day's efforts in the West to mount a recovery. The result is a deepening vortex of bad news that is whittling away North American growth projections and increases the risk of the U.S. and Canadian economies being pulled into what some call a widening global recession.
"I don't see any cheering on the sidelines for anything," said Fred Ketchen, a senior vice-president at brokerage ScotiaMcLeod Inc. in Toronto. "Things look as dark as they've looked in a long time, and there's nothing here that seems to be able to stop it."
Wednesday's market plunge capped a dismal quarter for both markets. The TSE 300 turned in its worst quarterly performance ever, while the Dow's 12.4 per cent slide marked its biggest three-month loss in eight years. Thursday, the Dow closed 18 per cent below its July 17 record of 9,337.97; the TSE 300 ended the day 30 per cent below April's record high of 7,822.25.
The carnage was touched off in Asia, where Tokyo shares fell 1.6 per cent to a new 12-year low. In Europe, blue-chip stocks in London sank 3.1 per cent to close at new lows for the year, while the key index in Frankfurt, Germany, closed down 5.5 per cent. The main indicator in Paris was also off five per cent.
North American markets are closing in on the levels they touched during early September's precipitous crash -- about 7,400 for the Dow and 5,420 for the TSE, said Katherine Beattie, an analyst with Standard and Poor's MMS in Toronto. "Those were the levels that halted the decline, and if those levels hold I think we're going to see buying come in," she said. "We'll see people coming in and saying, 'Right now's no good, but six months from now it's gonna be OK.' If those levels fail to hold, the damage could prove even more severe, she warned. "If we break those levels, I think we're going to go down another 600 points."
Fears are also mounting that while North America's economies are slowing, a recession may still be in the cards. The Bank of Nova Scotia issued a dire economic forecast Thursday that predicted a rate of growth for the Canadian economy that was well below forecasts earlier this year.
The stock market plunge, the commodities crunch and a slower economy will undercut consumer confidence and likely squeeze spending over the next year, the bank warned in its latest global economic outlook. Scotiabank predicted that a weaker Canadian economy will grow by only 2.9 per cent this year and 1.9 per cent in 1999. At those levels it will be difficult for the economy to produce enough jobs to dent the country's 8.3-per-cent jobless rate.
"The spread of financial market turbulence from Asia to Latin America, Canada, the United States and Europe has shown that even countries with favourable economic fundamentals are not immune from the contagion," wrote Scotiabank chief economist Warren Jestin.
The selloff in stocks has sent a flood of money into U.S. Treasury securities, a traditional haven in times of uncertainty. Interest rates on 30-year treasury bonds fell below five per cent Thursday, reaching levels unseen for long-term government bonds since 1967.
Traders were alarmed to see prices on the New York Stock Exchange nosedive 2.9 per cent Wednesday, even though the Federal Reserve had lowered a key interest rate one-quarter percentage point on Tuesday. Some traders were disappointed that the cut was not deeper amid fears a go-slow approach would not do enough to counter the economic crises that have swept through Asia and Russia and are threatening Latin America.
Yesterday, the Toronto Stock Exchange 300 composite index fell 176.14 points, or 3.1%, to 5437.98, taking out the recent closing low of 5530.71 on Aug. 31 and putting the index back to roughly where it was two years ago. Declines exceeded advances 668 to 325. Trading volume was 107.4 million shares, down from Wednesday's 114.3 million, while trading value fell to $2 billion from $2.16 billion.
''It's a very unsettled environment. People don't know what to do,'' said Irwin Michael, fund manager at ABC Funds. ''The market is very jittery.''
Toronto fell further than New York, where the Dow Jones industrial average closed down 210.09 points, or 2.7%, at 7632.53. The broader Standard & Poor's 500 composite index lost 3%, or 30.66 points, to 986.39.
Thirteen of the TSE's 14 stock groups fell.
Bob Boaz, a fund manager for University Avenue Funds, said the second big drop in two days reflects the various economic and earnings fears. "I've been finding a flood of analysts reducing their earnings [estimates] significantly for 1999," Boaz said, because some see a recession next year. "I don't believe in a recession next year."
Boaz said he continues to believe the recent drop in the market presents buying opportunities and doesn't see the TSE 300 falling much further.
In New York, the gold price on Comex rose US$3.20 to US$299.60 an ounce, benefiting from a weaker U.S. currency. Barrick Gold Corp. (ABX/TSE) rose $1.85 to $32.55 and Placer Dome Inc. (PDG/TSE) rose $1.40 to $22.50, leading the TSE's gold sub-index to a 5.85% gain. Gold is long considered a safe haven in times of financial
volatility.
Among individual blue chips, the stock of networking firm Northern Telecom Ltd. (NTL/TSE) closed down 60¢ at $48.50 after falling $12.60 the previous two days on a warning of a revenue growth shortfall. Competitor Newbridge Networks Corp. (NNC/TSE) dropped $2.40 to $25.05. BCE Inc. (BCE/TSE), Nortel's largest shareholder, fell $2.20 to $40.50.
A major part of the sell-off was a steep drop in Toronto's elephantine financial services sector, which encompasses nearly one fourth of the TSE 300. Investors' nerves have been frayed following the near collapse and subsequent bail-out of prestigious U.S. hedge fund, Long Term Capital Management. The financial services sub-index fell 5.5%. Newcourt Credit Group Inc. (NCT/TSE), North America's second largest commercial finance company, fell $8.50 before the stock was halted, but recovered somewhat to close at $33.25, down $6.25. The company's shares were hammered by a host of market rumors on Thursday, alleging financial problems or a pull-out by a major shareholder, Japanese bank Nomura International. Senior management said there was no truth to any of the speculation. Newcourt was asked by the TSE to issue a press release about its stock decline. Newcourt's response was to say its credit rating had been upgraded by Fitch IBCA and that it continues to enjoy good access to capital markets. Canadian Imperial Bank of Commerce (CM/TSE), which owns a stake in Newcourt, fell C$2.80 to C$25.75 and topped most actives.
Besides the battered banks, base metals fell 4.7%, conglomerates 4.6%, merchandising 4.4%, consumer products 3.9%, Utilities 3.9%, comunications and media 3.4%.
Telecommunications and telephone monolith BCE Inc. (BCE/TSE), the nation's largest public corporation, fell C$2.20 to C$40.50.
Rounding out the sectors on the losing side of the ledger were industrial products 3.1%, pipelines 2.7%, transportation and environmental 2.2%, paper and forest products 1.9% and real estate 1.7%.
The price of crude oil in New York plunged late in the day on profit-taking. It closed down US71¢ at US$15.43 a barrel. The TSE oil & gas composite index fell 2.1% or 112.47 to 5133.50. Among the sub-components, the integrated oils fell 2.0% or 151.51 to 7420.74. The oil & gas producers fell 2.4% or 112.08 to 4636.63 and the services group fell 0.4% or 5.45 to 1430.06.
Penn West Petroleum, Amber Energy, Canadian Occidental Petroleum, Gulf Canada Resources and Vermilion Resources were among the top 50 most active traded issues on the TSE.
Enerflex Systems gained $0.75 to $26.00, Denbury Resources $0.65 to $9.75, Penn West Petroleum $0.40 to $17.00 and Rio Alto Exploration $0.40 to $17.00.
Among percentage gainers, Canadian Crude Separators gained 13.5% to $2.35, Alpine Oil Services 8.0% to $1.08, Crown Joule Exploration 7.7% to $1.40, Pason Systems 7.5% to $2.85 and Denbury Resources 7.1% to $9.75.
On the downside, Talisman Energy fell $2.30 to $30.40 and Canadian Occidental Petroleum $1.70 to $30.40.
Percentage losers included Elk Point Resources 17.9% to $2.75, GHP Exploration 16.9% to $0.54, Magin Energy 11.5% to $3.85, Pendaires Petroleum 10.6% to $1.35 and Plains Energy Services 10.3% to $3.50.
The Alberta Stock Exchange combined value index gained 8.09 to 1761.31. Of the total traded issues, 135 issues advanced, 141 declined while another 115 remained unchanged. 12.3 million shares exchanged hands, valued at $4.2 million.
Corridor Resources, Colt Energy, Commonwealth Energy, First Star Energy, Underbalanced Drilling and Red Sea Oil were among the top 25 most active traded on the ASE.
Belfast Petroleum gained $0.35 to $2.30, Corridor Resources $0.10 to $0.50, Encounter Energy $0.10 to $1.00, Ironwood Petroleum $0.10 to $0.65 and Key West Energy $0.10 to $0.90.
On the downside, Northline Energy fell $0.20 to $1.30, Patria Resources $0.20 to $0.20, Lexxor Energy B $0.15 to $0.25 and Ionic Energy $0.10 to $1.50.
The Montreal Exchange market portfolio index tumbled 121.54 points, or 4.2%, to 2752.39 and the Vancouver Stock Exchange composite eased 1.56, or 0.4%, to 399.61.
Suffering from a two-day hangover following the Bank of Canada's cut in domestic rates on Tuesday, the Canadian dollar ended a hectic session sharply weaker on Thursday, plunging through key support levels.
The currency fell by nearly two Canadian cents against the U.S. dollar to end at C$1.5494 as investors became increasingly anxious about falling global stock prices and grim prospects for economic growth.
The value of one Canadian dollar shrank to 64.5 U.S. cents from 65.3 U.S. cents.
A global recession and resulting slower demand for commodities would undermine a recent fragile recovery in commodity prices. A rise in commodity prices is key to boosting the income of Canadian and thus sentiment for the Canadian dollar.
Following the lead of Europe and much of Asia, North American equities plunged on Thursday on spreading jitters over the state of the global financial system and corporate earnings.
"Uncertainty over the global economy is picking up and that's a problem for the Canadian market because we may not have seen a bottom yet for commodity prices," said Rob Palombi, senior fixed-income analyst at Standard & Poor's MMS.
"The market is still having trouble dealing with the Bank of Canada's reduction in interest rates," he said. "The Bank of Canada has isolated itself, the only other central bank to match the Fed so far."
Traders criticized Canada's central bank for following the U.S. Federal Reserve too quickly on Tuesday in cutting rates, instead of waiting until the following day to take advantage of a wider gap with lower U.S. interest rates. The Canadian dollar had appreciated ahead of the Fed credit easing as higher returns on Canadian securities attracted investors.
The Fed cut its key lending rate by 0.25 percentage points to 5.25 on Tuesday and about an hour later the Bank of Canada announced its own 0.25 percentage point cut to 5.75 percent. What could turn around the sentiment for Canada, Palombi said, would be credit easing by other Group of Seven (G7) nations, except for Japan, which has little room for further easing. Renewed expectations of a further Fed rate cut could also help.
Nervous investors are pinning their hopes on the G7 -- Britain, Canada, France, German, Italy, Japan, and United States. Finance ministers and central bankers from the group will gather on Saturday in Washington to compare notes on global economic issues.
U.S. Treasury Secretary Robert Rubin, in a speech to the Conference on the Americas in New York on Thursday, called on major nations, mentioning Japan, to act to boost world growth.
But another sign of stagnant U.S. manufacturing activity emerged on Thursday morning with the release of the September National Association of Purchasing Management (NAPM) index, which stayed below the boom-or-bust line of 50 for the fourth consecutive month.
On Friday, U.S. September jobs data will be released. Economists on average expect non-farm payrolls to show a gain of 199,000 after a rise of 365,000 in August.
"We'll see what the commodities look like," said Reid Farrill, executive director, foreign exchange, at CIBC Wood Gundy Securities. "If the Canadian dollar is going to surprise people, if it's going to be better than expected, it will probably come off the back of some firmness in commodity prices."
"But other than that, I think things still remain negative for the Canadian dollar, particularly the Canadian equity market," he said.
Gold rose to as high as US$300 an ounce on Thursday, but that is just one segment of the commodities market and the Canadian dollar needs a broader-based price pickup in commodities prices, from oil/gas and metals to wood and farm products, if it is to perform better.
Canadian bonds ended firmer on flight to quality. Canadian bonds ended firmer on Thursday as investors continued to run for cover into
fixed-income securities.
The trading pattern held for "buy bonds""and "sell stocks" through much of the day as stock market declines in Europe and much of Asia prompted heavy selling of North American equities.
Worries lingered over the global financial system and economic growth in the wake of the bailout last week of a huge U.S. hedge fund, Long-Term Capital Management. Top U.S. central bank policymakers defended the rescue.
Canada's benchmark 30-year bond due June 1, 2027 rose C$0.55 to C$139.68 to yield 5.293 percent. The U.S. 30-year bond surged 53/32, pushing down the yield further to 4.88 percent.
Canada's spread over the U.S. long bond widened to 41 basis points from 35 points at the previous close.
Safe-haven buying of North American bonds is expected to continue for now, "unless you think a 25-basis point cut (in interest rates) will save the world economy," said Harvinder Kalirai, economist at I.D.E.A. in New York.
The U.S. and Canadian central banks cut their key lending rates by 0.25 percentage points on Tuesday.
The market took little direction from Thursday's testimony by Federal Reserve Chairman Alan Greenspan to the House Banking Committee. He defended the bailout of the big U.S. hedge fund Long-Term Capital Management, saying its failure would have hurt global financial markets and many economies, including the United States.
But the message from another top U.S. policymaker was clear: the world economy does need help to keep afloat. U.S. Treasury Secretary Robert Rubin, in a speech to the Conference on the Americas in New York, called on major nations, mentioning Japan, to act to boost global growth.
On Saturday, the Group of Seven finance ministers and central bank governors meet in Washington ahead of the annual meetings of the International Monetary Fund and World Bank. The G7 policymakers are expected to discuss what they can do to boost global business and financial market sentiment.
Another sign of stagnant U.S. manufacturing activity emerged in the September National Association of Purchasing Management (NAPM) index, which stayed below the boom-or-bust line of 50 for the fourth consecutive month.
On Friday, U.S. September jobs data will be released. Economists on average expect the non-farm payroll to show a gain of 199,000 after a rise of 365,000 in August.
Weak jobs data would be a supportive factor for North American bonds.
In the short end, Canada's three-month when-issued T-bill yielded 4.92 percent after 4.98 at the previous close.
The market will be watching the result of the Brazilian general elections on Sunday for president and legislative representatives for any sign of political instability there, which could fuel concerns about a credit risk contagion.
For the coming weeks, the market will look at the U.S. economic climate and global sentiment before the next meeting of the Federal Open Market Committee on November 17.
|
