MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING MONDAY APRIL 27, 1998 (1)
MARKETWATCH
Rate Hike Fears Jolt Markets
Bay Street retreated as fears of a rise in interest rates sent stocks tumbling to their worst decline since Jan. 9. Wall Street also took it on the chin as banks and high-tech shares led the downward spiral.
North American stock markets suffered their worst one-day stumble in nearly four months yesterday, as investors embarked on the second consecutive trading day of aggressive profit taking.
"The market went down from the opening bell and never got off the canvas," said John Ing, president of Maison Placements Canada Inc.
Barely one hour into the trading day on the TSE, the 300 composite index had lost more than two per cent of its value, sliding nearly 170 points to 7,534.10 on volume of 32 million shares. Interest-sensitive bank stocks were hit particularly hard.
It was a reaction in part to New York, where the Dow Jones industrial average lost 145 points to 8,919.80 in early trading on news that an interest rate hike was soon to hit the markets.
While the markets didn't get up off the canvas, they did rally enough to regain consciousness. A flood of sell orders set the tone, but some strong buying in late afternoon minimized the damage. At mid-afternoon, the Dow was off about 224 points while the TSE 300 was down nearly 190.
The attempted comeback was a repeat of Friday when the Dow rallied from nearly 160 points off to just 78.71 down.
Ing said buyers continued to come into the market later in the day to buy on dips but that strategy could backfire if the correction deepens.
Many analysts predicted stocks could see a 5% to 10% pullback after the Dow and TSE 300 indexes racked up gains of about 16% in less than four months this year.
Mark Mullins, chief economist with Midland Walwyn Capital Corp., said the TSE 300 has surrendered 3.7 per cent of its value since markets closed Wednesday.
"It's all about the Fed . . . and I think those fears are well founded," Mullins said. "What's worse than that is that it appears that they're actually going to target the stock market.
"It doesn't make you feel good if you're the deer and the hunter's out there with a gun."
For experts like John McCaul, director of private client trading at ScotiaMcLeod Inc. in Toronto, a market tumble has been a long time coming.
"It's a bit like Wile E. Coyote, how he walks out over the edge of the cliff and he's standing there in mid-air, and he never falls until he actually looks down," said McCaul.
"I think we just all looked down."
There is little to suggest, however, that the sharp market drop that has been so hotly anticipated in recent months would be very large, said McCaul.
"We're just seeing some profit-taking, some second thoughts, and a perception of reluctance to buy at these levels," McCaul said. "We could give back seven per cent and move sideways for a period of time.
"I would anticipate that what we're dealing with is that kind of corrective process."
Markets in Canada and the U.S. have been tripped up in recent days and many analysts have been saying they have become fully valued, slowing demand for stocks and prompting investors to think about taking their profits.
The possibility of an interest rate hike, which typically hammers stocks because of what it means for the cost of corporate lending, was as good an excuse as any for many, McCaul said.
"The story in the Wall Street Journal was a rude awakening for investors," said Steve Saldanha, an analyst with Canada Trust in Toronto. "Whether or not it's actually true I have my doubts, and I think the markets have overreacted."
The U.S. central bank has long maintained that the Asian economic and currency crisis that struck last fall would serve as a sufficient brake to prevent the U.S. economy from overheating.
In fact, Asia's North American impact has not been as strong as was initially thought, and now a rate hike in the U.S. - as well as in Canada, by extension - is a foregone conclusion, Saldanha said.
"The story at face value is a rude awakening because it simply means the Fed is losing patience (with Asia)," he said. "It's no longer a question of if but when."
Part of the problem facing Canada is the fact that a rate hike in the U.S. would widen the rate spread with the Bank of Canada, which many economists have fingered as the reason for weakness in the Canadian dollar, Saldanha said.
A U.S. rate increase would give Bank of Canada governor Gordon Thiessen a perfect excuse to narrow that spread to shore up a weakening currency.
The Canadian dollar traded at 69.49 cents US this morning, down 0.21 cent from Friday's close.
The prospect of interest rate hikes to ward off inflation in the U.S. also shook bond markets and triggered a move to higher mortgage rates at Canada's major banks.
Mortgage shoppers will face increases of up to a quarter of a percentage point for all terms, effective this morning, at Canadian Imperial Bank of Commerce. Other banks are expected to match the increases.
Saldanha agreed a correction of between five and 10 per cent would not come close to erasing the record gains both New York and Toronto have posted in the last two years. Rates wouldn't likely go up by much, nor would they stay high very long since inflation doesn't seem to be a problem, he added. "A modest pre-emptive hike, which may cause a near-term knee-jerk reaction, will be fundamentally positive for the market after any brief correction."
Michael Metz, market strategist at CIBC Oppenheimer Corp. in New York, said the TSE 300 is less vulnerable to further selloffs than the U.S. market, where he predicts the correction could reach 15%.
Arun Kumar, senior U.S. equities strategist at Lehman Brothers Inc. in New York, said Fed-induced corrections have been sharp in the past and tend to last about a month. "This is probably not a one-day event."
The Dow is 2.9% off its record high of 9184.94 reached eight days ago, while the TSE 300 has dipped 3.3% from its record high of a week ago.
The two-day selloff is part of "a long-awaited correction" and hasn't surprised market players, Ing said. "Given the frothiness of the market, it was a question of when - not if." The market is now looking to the U.S. Federal Reserve for direction.
Investors in the U.S., already nervous about higher rates, were whipped into a frenzy by a Wall Street Journal report that said the Federal Reserve Board was planning an interest rate hike to slow the overheated U.S. economy.
After losses on both sides of the border Thursday, both the Dow and the TSE hit the skids Friday, with the Canadian market surrendering 113 points and the Dow 79 points.
Yestersay, the Toronto Stock Exchange 300 composite index lost 138.47 points, or 1.8%, to 7564.77. About 95.8 million shares changed hands on the TSE, down from 104.9 million shares traded on Friday. Canadian stocks had their biggest one-day slide since Jan. 9, when the market plunged 3.4%.
All 14 TSE index groups fell. The biggest declines were in utilities, down 3.04 per cent, conglomerates, down 2.70 per cent, and gold and silver, down 2.62 per cent.
Declining issues outnumbered advances 890 to 235 with 259 unchanged in trading of almost 96 million shares worth $1.8 billion.
The TSE utilities index lost three per cent, pulled lower by heavily weighted BCE Inc., which fell $2.30 to $60.60. BCE was the most active industrial with 2.1 million shares traded.
Major banks, who are hurt directly by higher rates, also led the decline. The Bank of Canada last raised rates 50 basis points to 5% in January to help bolster an ailing C$.
Bank of Nova Scotia (bns/tse) slid 80› to $39. and Royal Bank of Canada (ry/tse) lost $1.55 to $83.75 to pace the decline. Toronto Dominion Bank, (td/tse) slipped 50› to $63.10, Canadian Imperial Bank of Commerce (cm/tse) fell 70› to $48.90 and Bank of Montreal (bmo/tse) tumbled $1.65 to $76.75.
Northern Telecom Ltd. (ntl/tse) fell 40› to $87.50 and Newbridge Networks Corp. (nnc/tse) slipped $1.20 to $38.20 on concern that Asia's economic problems will further hurt exporters. Nortel attributed 7% of its sales to the Asia Pacific region last year, while Newbridge reported 18% of sales were made in the region.
Gold stocks like Barrick Gold Corp. and Placer Dome Inc. fell with the price of bullion. Gold fell US$3 to US$309.90 an ounce on the Comex division on the New York Mercantile Exchange. Barrick (abx/tse) lost 85› to $32.15 while Placer Dome (pdg/tse) slipped 55› to $20.70. The TSE's gold and precious metals subindex has fallen 6% in the past two sessions.
Boliden Ltd. (bol/tse) fell $1.45 to $10.45 after news it could face fines of as much as 50 million pesetas (US$330,000) and its managers jailed for up to four years after a reservoir dike at its Los Frailes mine in Spain collapsed.
Other Canadian markets fell. The Montreal Exchange portfolio fell 54.71 points, or 1.4%, to 3805.84. The Vancouver Stock Exchange lost 16.54 points, or 2.6%, to 619.76.
In New York, the Dow Jones industrial average dropped 146.98 points, or 1.6%, to close at 8917.64 points, its worst drop since Jan. 9. About 692.8 million shares changed hands on the Big Board, up from 639.2 million traded on Friday.
"This is a sharp reaction, but it could get even sharper," said Larry Babin, at money manager at Key Asset Management. "If interest rates are going up, stocks will be less attractive." The Fed last changed U.S. rates in March 1997, raising its target rate for overnight loans between banks by 1/4 percentage point to 5 1/2%.
Volatile technology stocks and rate-sensitive financials were among the worst hit by the rate fears.
The Standard & Poor's 500 index tumbled 21.36 points, or 1.9%, to 1086.54.
The Nasdaq composite index tumbled 48.65 points, or 2.6%, to 1820.31, led by Microsoft Corp.
Stocks rallied in the final hour of the session as traders bought shares well below their record highs.
J.P. Morgan & Co. (jpm/nyse) fell US$3 5/16 to US$132 5/16, Citicorp (cci/nyse) lost US$5 1/2 to US$149 1/2, down from its record close of US$180 1/2 on April 6 when it announced a merger with Travelers Group Inc. Travelers (trv/nyse) fell US$2 1/16 to US$60 15/16, below its close of US$61 11/16 before the merger was announced.
Bellwether high-tech stocks also took a hit. Intel Corp. (intc/nasdaq) shed US$2 1/16 to US$80, Microsoft (msft/nasdaq) lost US$1 13/16 to US$90 5/16, Dell Computer Corp. (dell/nasdaq) fell US$2 to US$74 5/16 and International Business Machines Corp. (ibm/nyse) dropped US$2 5/16 to US$115.
The correction in stocks is global: London's FT-SE 100 index lost 2.3% yesterday and is down 6.3% from its April 6 record. The story is similar on other European exchanges and even more dramatic on Italy's Mibtel 30 index, which lost 6% yesterday and is down 16.7% in the past three weeks.
Fears of a rise in U.S. interest rates, perhaps as early as May 19, sent European bourses and bonds cascading into the red on Monday and raised the spectre of a global market crash.
After an hour and a half of trading, the Dow Jones Industrial Average had fallen 1.9 percent while London's FTSE 100 blue chip index was down 2.7 percent to score a seven week low.
Frankfurt's computer-traded Xetra DAX index lost 2.8 percent to dip below the 5,000 support level while Paris's CAC-40 also retreated by 2.6 percent below its key psychological level of 3,700.
''Everything hinges on what happens on Wall Street overnight now,'' said Ian Williams, strategist at Panmure Gordon in London. ''But in my opinion there are too many people being cautious for there to be a crash.''
The rate jitters, which also knocked U.S. shares on Friday, intensified after a Wall Street Journal report on Monday said the Federal Reserve had shifted from a neutral to a tightening bias at the March 31 meeting of the policy-making Federal Open Market Committee.
''Markets are right to be very cautious about what the Federal Reserve might do,'' said DKB chief economist Gerard Lyons.
''The risk of a U.S. rate rise has gone up recently, not because of the data but because of some of the comments we've had recently from Fed officials.''
Lyons said he did not believe the U.S. economy needed an interest rate rise but comments such as those last week from Fed Governor Roger Ferguson, who warned that rates might rise, had suggested a more hawkish stance from the Fed.
In bonds, the U.S. market was hardest hit with Treasuries down almost 1-1/2 point.
The British market followed with gilts down by 2/3 point and German Bunds were over 1/2 point weaker, with the added burden of last weekend's elections in the East German state of Saxony-Anhalt.
The German markets were also chewing over the battering which Chancellor Helmut Kohl's CDU party received in Sunday's state elections in Saxony-Anhalt.
Analysts said the markets were taking the news in their stride, despite some ripples of worry about the success of the extreme right German People's Union's (DVU) party.
Analysts downplayed the results, arguing that the strong result of the DVU would not have much bearing on the national scene.
World Summary:
London: Nervousness over whether the Federal Reserve was planning to raise U.S. interest rates triggered the biggest points fall for Britain's FTSE 100 index so far this year. The FTSE 100 closed at 5,722.4, down 141.5 points, or 2.41 percent.
Frankfort: Weighed by a sharp fall on Wall Street, German stocks closed with hefty losses and barely above a significant support level. The DAX-30 index closed at 5,088.13, down 56.15 points, or 1.09 percent. In later screen-based trade, the Xetra DAX index ended at 5,002.71, down 141.71 points, or 2.75 percent.
Paris: The correction in Paris stocks finally became more full blooded as U.S. markets found a bone for bears to get their teeth into -- suggestions that the Fed may be gearing for a hike in key rates. The CAC-40 index closed at 3,685.83, down 97.51 points, or 2.58 percent.
Athens general index down 7.0 percent on profit-taking, investors preoccupied with media reports of a delay in the privatisation of Commercial Bank.
Italy's all-share Mibtel index closes down 6.57 percent after a day's low of minus 7.83 percent off on selling by domestic retail investors after gains of more than 40 percent this year.
Lisbon down 6.3 percent.
msterdam shares close down 5.0 percent, hit by options trade after hitting all time high on April 22.
Madrid, Brussels down 3.2 percent.
Copenhagen shares down 3.1 percent on a labour dispute which began on Monday, covering almost one fifth of the workforce.
Zurich: Swiss stocks extended early losses to end nearly 2.5 percent lower, moving down with other European markets amid an early slump on Wall Street. The Swiss market index closed at 7,053.5, down 178.8 points, or 2.47 percent.
Joannesburg: Market closed due to Freedom Day holiday.
Tokyo: Japanese stocks fell because investors were disappointed with the government's long-awaited economic stimulus package, traders said. Tokyo's benchmark Nikkei Stock Average of 225 selected issues plunged 361.29 points, or 2.26 percent, closing at 15,649.95. The fall more than erased Friday's gains of 249.55 points, or 1.58 percent, ahead of the stimulus package's release. The measures to boost Japan's flagging economy included a one-time income tax cut but not the permanent tax relief that many economists say is necessary to entice Japanese consumers to spend again.
Hong Kong: Share prices in Hong Kong tumbled 2.6 percent, largely in reaction to Friday's slide on Wall Street. The Hang Seng Index, the Hong Kong market's key indicator of blue chips, fell 286.22 points to 10,593.71, it lowest level since Feb. 19. On Friday, the index had slipped 39.01 points. Brokers attributed the decline to Wall Street's fall Friday, when the Dow Jones industrial average fell 78.71 points, or 0.8 percent, closing at 9,064.62. They said investors were concerned over a possible increase in U.S. interest rates soon. The sharp fall on the Tokyo Stock Exchange also dampened sentiment in Hong Kong, brokers said.
Seoul: Share prices closed lower on a lack of buying by both local and foreign investors. The Korea Composite Stock Price Index fell 5.38 points, or 1.3 percent, to 406.25.
Singapore: Share prices closed mostly lower. The Straits Times Industrials Index fell 1.3 percent, or 19.81 points, to 1,471.47.
Bangkok: Thai share prices closed lower as investors sold off finance sector stocks. The Stock Exchange of Thailand index fell 6.00 points, or 1.4 percent, to 418.79.
Taipei: Share prices closed sharply lower as investors remained worried about declining economicgrowth and setbacks in U.S. markets on Friday. The market's key Weighted Price Index fell 164.49 points, or 1.90 percent, to 8,471.62.
Jakarta: Share prices closed lower. The Composite Index fell 4.840 points, or 0.9 percent, to 485.641.
Kuala Lumpur: The Kuala Lumpur's Composite Index fell 14.32 points, or 2.3 percent, closing at 620.79. Malaysian shares slumped after the Rashid Hussain group of companies resumed trading following the release of the financing details for its acquisition of Sime Bank Bhd. Traders said investors were selling on the perception that Rashid Hussain's purchase of Sime Bank was a bail-out not only of one of Sime Bank's major shareholders - KUB Malaysia Bhd. - but also of Rashid Hussain as the purchaser. They said the complicated financing structure of the deal has made investors jittery.
Manila: Share prices closed lower, with most investors staying on the sidelines ahead of the elections on May 11. The 30-share Philippine Stock Exchange Index tumbled 31.72 points, or 1.5 percent, to 2,122.19.
Sidney: Australian stocks finished broadly lower on profit-taking triggered by Friday's Wall Street fall, lower commodity prices and weaker Asian markets. The All Ordinaries index closed at 2,818.0, down 36.9 points, or 1.29 percent.
Wellington: New Zealand share prices closed generally lower, with weakness among a number of leading stocks dragging the index down. The NZSE-40 Capital Index fell 35.22 points, or 1.52 percent, to 2,287.61.
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