MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING WED., APRIL 29, 1998 (1)
MARKET WATCH
Bay Street was in positive territory for a second day, with bank and gold issues leading the advance. High-tech companies gained on Wall Street as expectations grew that a strong U.S. economy will boost profits.
Canadian stocks rose for a second day, led by Seagram Co., as investors reacted favorably to speculation it is in talks to acquire British-based music company EMI Group PLC. Banks and gold producers helped buoy the broader market.
The Toronto Stock Exchange 300 composite index rose 41.86 points, or 0.6%, to 7609.53. About 106.4 million shares changed hands on the TSE, down from 114.9 million shares traded on Tuesday. Advancing issues beat out decliners 559 to 436 and 325 closed flat.
Seagram shares (vo/tse) rose $2.70 to a record close of $60.20. The beverage and entertainment company gained 2.70 or nearly 5 percent to 60.20 in brisk dealings of nearly 1.6 million. Seagram's rally was attributed to reports it could be courting British music concern EMI Group Plc , the famed music label of the Beatles and Rolling Stones.
Bombardier Inc. class B shares also advanced as investors selected stocks badly mauled in recent days. Bombardier shares (BBDb/tse) jumped $1.65 to $37.50.
Barrick Gold Corp. (abx/tse) rose 60› to $33.30 and Placer Dome Inc. (pdg/tse) climbed 70› to $21.85 to lead gold stocks higher. Barrick was the most active issue in Toronto with 2.5 million shares changing hands. The gold and precious metals subindex accounted for nine points of the TSE 300's advance.
''Gold stocks are the best performer of the day,'' said liability trader David Jarvis at Levesque Beaubien Geoffrion. The gold group led 10 of Toronto's 14 subindexes higher, posting a 2.11 percent increase with the help of better gold bullion prices. The Comex June gold contract rose $2.20 to $311.60 in New York.
''The banks have been under pressure all day and are coming back on a strong U.S. market,'' Jarvis added. Canadian Imperial Bank of Commerce (cm/tse) climbed 70› to $50.40, Toronto Dominion Bank (td/tse) jumped 80› to $64.55 and Bank of Nova Scotia (bns/tse) gained 25› to $39.40.
The financial services sector, which makes up nearly a quarter of the TSE 300 at 23.13 percent, rose 0.59 percent. Other sectors with winning ways were consumer products, up 1.74 percent, and media, which rose 0.9 percent.
Tempering those gains were losses in paper and forest products, off 0.7 percent, pipelines, utilities and conglomerates.
Telecommunications-equipment maker Newbridge Networks Corp. (nnc/tse) climbed $2.45 to $41 after a report it sold US$225 million of debt in a U.S. private placement, raising speculation it plans to make an acquisition. Newbridge also held a meeting on Wednesday with analysts and clients at a Hambrecht & Quist high technology conference in San Francisco.
Other Canadian markets rose. The Montreal Exchange portfolio climbed 26.37 points, or 0.7%, to 3840.41. The Vancouver Stock Exchange edged up 5.06 points, or 0.8%, to 624.59.
TODAY' S EXPECTATIONS
" Canadian dollar - Stronger, 1.4290 - 1.4370
" Canadian money mark et - Stronger, flattening bias
" Canadian bond mark et - Stronger, steepening bias
" US bond mark et - Stronger
" Canada - US spreads - Canada underperforms slightly
TODAY' S MARKETS
" Bond Market The US Treasury mark et rallied sharply following the release of mixed economic news this morning. While first quarter growth came in much stronger than most observers had expected, market participants took comfort from the bullish inflation and employment cost information. We expect the positive tone to hold, but we may already have seen the highs of the day. The Canadian bond market has benefited from a stronger currency and a rallying US market this morning. Canada should continue to lag the US to the upside, but the steepening trend is likely to continue.
"Money Market In spite of the light overseas action, the strength in the currency will likely fuel solid buying in the Canadian money today. Continued speculation over a potential Bank of Canada action lingers in the market, but most domestic investors will view rates still above the 5% level as attractive. The benign US inflation reports will also help the market.
" Foreign Exchange A strong advance during London time and this morning's rally in the US Treasury market have given the Canadian dollar significant positive momentum. The currency has already broken through the 1.4320 level, but appears to be meeting some resistance closer to 1.4300. We expect the positive bias to linger in the mark et, but would be surprised to see a significant break below 1.4300.
In the U.S., technology stocks were again the market's best performers, as the Nasdaq closed up nearly 20 points. The Dow snapped a five-day losing streak with a gain of 52.56, while the S&P 500 rose 9.51. However, all major indices ended off intraday highs, suggesting that nervousness remains.
The Dow Jones Industrial Average ($INDUA) gained and then lost nearly 50 points in the first hour of trading. Thereafter, the blue-chip proxy rose smartly, topping out at 8,994.87 or some 95 points up from its opening level. The enthusiasm waned some of the final hour of trading, leaving the Dow with a gain of 52.56 points at 8,951.52.
The Nasdaq Composite Index (COMP) followed a similar pattern but with less divergence than the Dow. The tech-induced index rose as high as to 1,854.11 before closing up 19.87 or 1.1% to 1,851.64.
The S&P 500 (SPX) closed up 9.51 or 0.9% to 1,094.62 while the Russell 200 Index ($IUX) enjoyed a second straight day of gains, closing up 4.44 to 476.98.
In NYSE trading, 642 million shares were exchanged, while the breadth of the market favored advancers by a 9-to-5 spread. In Nasdaq trading, 803 million shares changed hands, while advancers bested declining stocks by a 25-to-17 spread.
"This bull market is so powerful that you don't kill it with one cannonball," said Don Hays, chief investment strategist at Wheat First Union in Richmond, Va.
While the prospect of rising interest rates is a negative development for the stock market, "it's just the first shot across the bow -- it's not going to sink the ship yet," he said.
Viacom Inc. (viaa/amex) rose US$2 15/16 to US$58 1/2 after the owner of MTV, the Blockbuster video chain and a Hollywood movie studio posted an unexpected first-quarter profit, thanks in part to the phenomenal success of Titanic.
Computer shares rose, boosted by comments made by Dell Computer Corp. on Monday. Thomas Meredith, the firm's chief financial officer, said demand for Dell's personal computers is "robust" and shipments in the industry could grow 14% to 20% this year.
Dell shares (dell/nasdaq) rose US$1 9/16 to US$77 5/8, Hewlett-Packard (hwp/nyse) gained US$2 11/16 to US$75 and Gateway 2000 Inc. (gtw/nyse) climbed 1/2 to US$57 11/16.
Shares of Lucent Technologies Inc. (lu/nyse) rose US$1 3/4 to US$74 3/16 one day after the company said it would buy Yurie Systems Inc. for US$1 billion. Lucent's stock is now worth about US$96.5 billion, about US$1 billion more valuable than shares of AT&T Corp., its former parent company.
One of the day's biggest advancers was Neurex Corp. (nxco/nasdaq), which surged US$8 11/16 to US$28 7/16. Elan Corp. agreed to buy the company for US$700 million in stock, giving the Irish healthcare provider a gateway into the U.S. painkiller market. Elan shares (eln/nyse) fell US$3 1/2 to US$58 7/8.
"Back to basics" could be the theme Thursday. With the prospect of a rate hike from the Fed squarely back in the market's consciousness, stocks will likely take their cues from bonds as the first quarter employment-cost index and GDP reports will take center stage.
The employment-cost index, which no less an authority than Fed Chairman Alan Greenspan has cited as one of the better indicators of the labor market's strength, is the real star Thursday. Economists expect ECI to rise 0.9% in the first quarter, versus a 1% gain in the final stanza of 1997.
If the figure is just one-tenth of a percent above consensus, it would signal the strongest back-to-back performance for the index since the second quarter of March 1992, according to John Lonski, chief economist at Moody's Investor Service.
"That would be an important development," Lonski said. "To assuage credit market fears of a Fed rate hike, the ECI would probably have to rise no more than 0.8% for the quarter. If it's in excess of 1%, that would be bad for bonds."
With growth in wages and salaries "continuing to proceed at a relatively brisk pace," sluggishness in the benefits component of the index is the credit market's best hope for salvation Thursday, the economist said. However, market players should not be lulled into a false sense of security about benefits inflation, he said.
"From what we know about problems plaguing the HMO industry, higher fees for HMO premiums are all but inevitable," he said. "It's not a question of whether health-care inflation moves higher, but the degree to which it climbs over the course of 1998."
As for the GDP report, expectations are for growth of 3.3% in the first quarter, down from 3.7% in the fourth quarter of 1997.
Because it is more easily forecast and will be revised several times, the GDP figure will figure less prominently Thursday than the ECI data, Lonski said, unless it is materially weaker or stronger than expected.
As for the burning question of whether the Fed will raise rates anytime soon, the economist echoed a now-familiar refrain. There are compelling arguments as to why the Fed should hike rates -- namely, tight labor markets, a strong housing environment, burgeoning money supply growth, and asset-price inflation. Yet the Central Bank is restrained from taking action because signs of actual inflation are minimal and a rate hike could further destabilize Asian economies.
Still, "we have to respect the fact that domestic spending has proceeded at a rapid clip and labor markets have tightened, which favors a rate hike," he said. "I think it's unlikely the Fed hikes on May 19, but I'm unclear about the July meeting. The risks still favor higher interest rates than lower."'
Given that it is somewhat hamstrung from taking action right now, Lonski said it was prudent for the Fed to try to "cool off" the equity markets through leaks to the financial press, namely The Wall Street Journal and Washington Post.
But some equity participants wonder about the effectiveness of such jawboning.
"We've had the biggest gains we've seen since Greenspan said 'irrational exuberance,' " recalled the head trader at one equity desk, who asked not to be identified. "There's so much optimism right now, we have to see some action to get a slowdown. I think talk is cheap as far as that's concerned."
If Thursday's economic data supports the view that inflation remains tamed, a sense that the Fed is "crying wolf" may emerge, sending stocks higher once again. Ironically, if Wall Street does not heed the Fed's warning, it may force the central bank to pull the trigger.
A self-fulfilling prophecy, that is.
Major overseas markets were mixed.
London: British shares took reassurance from a rebounding Wall Street. The FT-SE 100 index rose 26.5 points, or 0.5%, to close at 5833.1.
Frankfurt: German shares rose. The Dax index climbed 89.81 points, or 1.8%, to 5108.48.
Tokyo: Japanese markets were closed for a national holiday.
Hong Kong: Stocks closed sharply lower, with futures traders taking advantage of negative sentiment in the local property market. The Hang Seng index lost 207.46 points, or 1.9%, to 10,471.15.
Sydney: The all ordinaries index lost 32.2 points, or 1.2%, to 2749.1.
STOCK MARKETS THIS MORNING
London - FTSE 100: 5847.4 points, up 14.3 or 0.25 percent
Frankfurt - Xetra DAX: 5097.38 points, up 13.58, or 0.27 percent
Paris - CAC-40: 3737.48 points, up 3.55, or 0.1 percent
PRECIOUS METALS (figures in brackets previous London PM fix)
Gold - $310.75 per ounce ($308.45)
Silver - $6.215 ($6.13)
Brent crude oil futures $14.3, up $0.05
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