MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING TUESDAY APRIL 28, 1998 (1)
MARKET WATCH
<b<Mixed messages on the path interest rates are likely to take prevailed yesterday, and helped keep sector gains to a minimum on both the Dow and the TSE
Canadian stocks were mixed, as investors debated whether the Federal Reserve will raise interest rates to slow economic growth. Canadian Imperial Bank of Commerce and other banks maintained early gains, while shares of leading exporters fell.
If the Fed raises rates at its next meeting May 19, that will probably force the Bank of Canada to lift its key lending rate to maintain the attractiveness of the currency and C$ denominated securities.
Tuesday, North American markets paused after a Washington Post article disputed the accuracy of Monday's Wall Street Journal piece and noted higher short-term interest rates were not necessarily in the offing.
"Today's there's no conviction," said portfolio manager Irwin Michael at ABC Funds. "The market is drifting." Irwin added that Toronto had a tremendous move upward recently and it was time for cautious investors to consolidate profits.
Rolie Bradley, institutional salesman at Maison Placements Canada, agreed. After a positive opening "we spent the rest of the day sort of backing and filling," Bradley said.
Fred Ketchen, chief equities trader at ScotiaMcLeod in Toronto said ''There is still this tug of war going on between those who think there is going to be an inevitable rate increase in the U.S., and those who question whether or not it will ever come about, at least in the short-term.''
The Toronto Stock Exchange 300 composite index rose 2.9 points to 7567.67, after surrendering an early 67.2-point gain. About 114.9 million shares were traded, up from about 95.8 million shares traded on Monday. Turnover was worth C$2.3 billion. Advancing issues edged declines 529 to 499 and 297 finished flat.
Eight of Toronto's 14 subindexes lost ground including transportation, off 1.05 percent, base metals and minerals, down 0.86 percent and paper and forest products, off 0.82 percent. The positive side was led by influential golds, up 0.93 percent, consumer products, which rose 0.68 percent, and media, up 0.56 percent.
Transportation companies posted the largest losses on the session, led lower by Canadian National Railway, which slid 50 cents to $93.00 while troubled Philip Services dropped 30 cents to $10.85 and Laidlaw Inc., lost 25 cents to $19.20.
BCE Inc. (bce/tse) fell 60› to $60 and Northern Telecom Ltd. (ntl/tse) slipped 20› to $87.30. CIBC (cm/tse) rose 80› to $49.70 and Toronto Dominion Bank (td/tse) rose 65› to $63.75.
While banks typically are first to fall in times of higher rates, an analyst said that they had been hit hard in recent weeks and are seen as cheap. The TSE's financial services subindex has fallen 8% since touching a record of 10726.01 on April 14. The subindex rose yesterday 47.71 points, or 0.5%, to 9790.49
Seagram Co., which accounts for 2.2% of the TSE 300, touched a 10-month high because of persistent reports the liquor and entertainment company is in acquisition talks with Britain-based music company EMI Group PLC. Seagram (vo/tse) gained $1.35 to $57.50.
Better-than-expected earnings from Placer Dome Inc., which accounts for 15.2% of the TSE's gold and precious minerals subindex, helped lift gold producers. Placer Dome (pdg/tse) gained 45› to $21.15, Barrick Gold Corp. (abx/tse) rose 55› to $32.70 and Kinross Gold Corp. (k/tse) rose 20› to $6.65. On the Comex division of the New York Mercantile Exchange, gold fell US$1.60 an ounce yesterday to close at US$308.30.
Toronto-based mining company Boliden Inc., which is under investigation after a terrible toxic spill at the company's mine in Spain, saw its share price drop by a nickel to close at $10.40. After the news broke Monday of the disaster, the company's share price dropped by $1.45.
Other Canadian markets finished mixed yesterday. The Montreal Exchange portfolio rose 8.2 points, or 0.2%, to close at 3814.04. The Vancouver Stock Exchange fell 0.23 of a point to close at 619.53.
TODAY' S EXPECTATIONS
" Canadian dollar - Neutral, 1.4350 - 1.4400
" Canadian money mark et - Stronger, flattening bias remains
" Canadian bond mark et - Slightly stronger, steepening bias
" US bond mark et - Neutral
" Canada - US spreads - Canada outperforms modestly
TODAY' S MARKETS
" Bond Market The US Treasury mark et is expected to retain its cautious sentiment today, as the mark et remains vulnerable to strong economic news. This week 's raft of economic releases may give mark et participants further clues to the Fed's intentions in May. This morning's Canadian economic releases will be ignored by the mark et. The more important Employment report for February was released more than a month ago. The slightly stronger tone to the Canadian dollar should help Canada outperform the US modestly today.
" Money Market On the heels of the buying interest seen in overseas action, the Canadian money mark et is poised to mak e further gains today. While speculation over a potential Bank of Canada rate hik e continues to swirl through the mark et, the stronger tone in the currency will allow buyers to move into the longer maturities. The modest improvement in the US mark et will give additional support.
" Foreign Exchange The sharp move stronger by the Canadian dollar in overseas trading has left somebuncertainty in the mark et at the open this morning. Short-term technicals suggest that the stronger range will hold today, but that another push to the weak side will lik ely emerge over the next few sessions. Firm tone in the US dollar will provide some additional support today.
In the U.S., the Dow Jones industrial average fell 18.68 points, or 0.2%, to 8898.96. About 682.6 million shares changed hands on the Big Board, down from 692.8 million shares traded on Monday.
The Standard & Poor's 500 index slipped 1.43 points to 1085.11.
The Nasdaq composite index gained 11.46 points, or 0.6%, to 1831.77.
PepsiCo (pep/nyse) fell US$3 7/16 to US$39 5/8 after the soft drink maker reported that beverage sales in North America slowed last month. Earnings were US1› better than analysts' expectations.
Entertainment stocks gained after falling Monday. Walt Disney Co. (dis/nyse) rose US$2 5/8 to US$123 3/8, Time Warner Inc. (twx/nyse) gained US$1 7/8 to US$75 7/8 and Viacom Inc. (viaa/amex) gained US$21 15/16 to US$55 9/16.
Some drug makers gained, with Merck & Co. (mrk/nyse) up US$2 3/4 to US$115 3/8 and Eli Lilly & Co. (lly/nyse) up US$1 to US$68 5/8.
Internet stocks also rose yesterday. Amazon.com Inc. (amzn/nasdaq) soared US$12 7/8 to US$95 5/8 after the Internet bookseller said its quarterly loss widened by less than expected. K-tel International Inc. (ktel/nasdaq) gained US$3 7/16 to US$38 3/16, and Yahoo Inc. (yhoo/nasdaq) rose US$6 3/8 to US$118 1/2.
After Monday's wash-out and Tuesday's washed out rally, the forces of negativity appear to be gaining strength on Wall Street. The Dow has fallen for five straight days and concerns about a Fed tightening of interest rates are paramount. But don't be lulled into believing a bear market is at hand.
First, the Dow is off less than 300 points from its all-time best despite the recent setbacks. Additionally, beneath the surface of the Dow's ($INDUA) setback, Tuesday saw a solid performance by breadth indicators, evident in the small-cap Russell 2000 Index ($IUX), which rose nearly 1%, and the Nasdaq Composite (COMP), up 0.6%. The S&P 500 (SPX), meanwhile, was essentially unchanged Tuesday.
The performance of the S&P 500 Tuesday is indicative of the fact that Wall Street is struggling to find its focus. Earnings growth has clearly cooled, the prospect for higher interest rates is unsettling, and major indices remain just below all-time high levels with valuations near historic highs. Yet at the same time, arguments for why stocks should reaccelerate remain compelling; although the ride may be in a Yugo rather than a Ferrari.
"We don't believe the market is in for a 10% correction right now," said Carl Bathena, investment strategist at Everen Securities. "The market will consolidate, become more selective, sector rotation will pick up and market volatility will increase. But the [Dow] should go up to 9,500 within the next one to three months."
Bathena listed several "drivers" that have long served to prop stocks and will continue to do so.
First, investors have a "higher risk tolerance" and are thus "more willing to price off of next year's earnings estimates," he said. Additionally, interest rates remain benign -- even if the Fed does hike rates by 25 basis points, the economy is "balanced," and money flows are "very ample." All those factors -- and the market's continued resistance to declines -- result from the fact that no recession appears on the horizon.
However, Bathena acknowledges that "the market is definitely changing character to some extent." Word of the Fed changing to a tightening bias "came at a bad time," he said, noting the disappointment about Japan's latest fiscal stimulus package and that investors are becoming "more cognizant" of the fact that earnings growth is slowing.
For those reasons, Bathena does not expect small-cap stocks to seize a leadership position in the market, Tuesday's performance notwithstanding.
"It's difficult to see a near-term catalyst to carry them from a laggard position. We believe there will be some hesitation in smaller caps," he said. "The real thing that's hurting smaller caps is that market levels are lofty and people feel uncomfortable with relatively illiquid stocks. Plus, the prospect of short rates rising turns investors more toward large-cap stocks."
There is no major economic data scheduled for release Wednesday, although earnings are due from CompUSA (CPU), Ericsson (ERICY), and Pharmacia & Upjohn (PNU).
Given that Wall Street has resumed its post on "Fed Watch," there will likely be some hesitation ahead of Thursday's key employment cost index and gross domestic product reports. As was the case Tuesday, expect volatility intraday but for major indices to end not far off their opening levels.
Major international markets ended mixed yesterday.
London: Britain's FT-SE 100 index staged a dramatic recovery, recouping most of Monday's big selloff as sentiment over U.S. interest rates improved. The FT-SE closed at 5806.6, up 84.2 points, or 1.5%.
Frankfurt: Germany's blue-chip Dax index closed at 5018.67, down 69.46 points, or 1.4%. Traders said the market benefited from subsiding U.S. interest rate fears.
Tokyo: Stocks ended at their lowest level since mid-January. The 225-share Nikkei average closed at 15,395.43, down 254.52 points, or 1.6%.
Hong Kong: Stocks staged a comeback in afternoon trading to close higher. The Hang Seng index closed at 10,678.61, up 84.9, or 0.8%.
Sydney: The Australian share market ended down 1.3% after Wall Street's slide overnight, but well above the day's lowest levels as fears of a major U.S. setback slowly subsided in afternoon trade. The all ordinaries index closed at 2781.3, down 36.7 points.
World Markets Wednesday:
Jakarta shares plunge, London up at noon
Share prices in Indonesia plunged Wednesday amid fears that the International Monetary Fund may delay part of a bailout loan to the country.
Prices also fell sharply on the Hong Kong and Thai markets, but surged in South Korea and Singapore. Japanese markets were closed for a national holiday. Jakarta's benchmark JSX composite index closed down 4.1 percent at 465.247 points on heavy selling almost across the board.
Analysts said investors are waiting to see whether the IMF board, opening a meeting May 4, would disburse a dlrs 3 billion loan as part of the bailout package for Indonesia's economy.
Reports that police clashed with students in Medan Wednesday also dampened market sentiment, they said.
"Fears that the student demonstrations demanding total political and economic reforms will possibly turn into chaos ... sent the market into jitters," said Fajar Limin Sutandi, head of research at PT Sigma Batara Securities.
In late trading, the rupiah was at 8,195 to the dollar, slightly down from Tuesday's close of 7,950.
In Hong Kong, share prices fell sharply on growing concerns that the market was headed for more near-term losses.
The blue-chip Hang Seng Index closed down 1.9 percent at 10,471.15.
Traders said futures-related selling on the May contract helped drag the market lower, suggesting outlook for the month ahead is grim.
The market has lost about 8 percent in the past two weeks as pessimism grows about whether previous gains could be sustained. Several traders predicted the Hang Seng Index could easily fall below the psychologically important 10,000 barrier over the next week, which would be the lowest level since late January.
The market also has been shaken by uncertainty over the U.S. market and U.S. interest rates, as well as negative news on the local economy and regional currencies, said Antony Mak, a trader at Vickers Ballas Holdings Ltd.
Thai stock prices also ended sharply lower as investors sold out ahead of a long weekend amid uncertainty about how soon new government measures can ease high interest rates, dealers said.
The Stock Exchange of Thailand index lost 1.7 percent to 412.25.
On Tuesday, the Cabinet authorized issuing billions of dollars worth of global and local government bonds to ease tight liquidity and push down short-term interest rates. But it will probably take months to take effect.
Meanwhile, share prices in South Korea surged on expectations of lower interest rates, with the benchmark index soaring 3.6 percent to 417.05 points.
"Expectations that local interest rates may fall further amid the more stabilized won-dollar market boosted sentiment," said Yun Sam-wee, an analyst at LG Securities Co.
Earlier in the year, the IMF and the government agreed to lower local interest rates in stages when the South Korean won stabilized against the U.S. dollar.
Meanwhile, the government's decision to scrap the foreign stock holding limit soon also boosted sentiment, analysts said.
South Korea's financial watchdog, the Financial Supervisory Commission, was reported pushing to eliminate the aggregate ceiling on foreign investment in local stocks within the first half of this year.
The government earlier agreed with the IMF that it would completely abolish the limit by the end of this year.
Share prices also soared in Singapore in a technical rebound following the market's downward trend in recent weeks, dealers said. The benchmark Straits Times Industrial Index gained 1.4 percent to 1,502.11. But dealers said overall sentiment remained weak and the index may break through the psychologically important 1,400-point level.
Elsewhere:
Kuala Lumpur: Malaysian shares ended mixed, with the key index closing slightly higher, buoyed by local support for index-linked stocks, traders said. The key index gained 2.04 points to 622.88.
Manila: Philippine stocks ended mixed in another lackluster session. Some investors bought bargain-priced issues while other stocks were sold down by market players eager to reap quick gains, traders said. The key index rose 7.30 points to 2,133.99.
Taipei: Taiwan shares closed lower on renewed investor fears of sluggish economic growth and poor corporate performance in the second quarter, analysts said. The key index ended down 1 percent at 8,348.35.
Sydney: Australian share prices closed weaker as jittery investors sold down share holdings in response to lackluster domestic Consumer Price Index data. The key index shed 32.2 points to 2,749.1.
Wellington: The key New Zealand index finished higher in active trading. It closed up 10.04 points at 2,250.13.
In London share prices on the London Stock Exchange were higher at midday Wednesday. At noon, the Financial Times-Stock Exchange 100-share index was up 23.1 points at 5,829.7.
The British pound was quoted at $1.6642 US, down from $1.6660 US.
In Toronto, the Canadian dollar closed at 69.44 cents US on Tuesday, down 0.06 cent. The U.S. dollar stood at $1.4400 Cdn, up 0.12 cent.
In London, the Canadian dollar is trading at 69.42 cents US, down 0.02 cent from Tuesday's close.
London dealers fixed a recommended gold price of $307.55 US per ounce at midmorning, up from the closing price of $306.90 US bid Tuesday.
In Zurich, the bid price was $307.50 US, unchanged from $307.50 US late Tuesday.
Earlier in Hong Kong, gold fell $1.80 US to close at $307.55 US bid.
Silver opened in London at $6.12 US bid troy ounce, up from $6.11 US bid Tuesday.
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