MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 12, 1998 (3)
FRIDAY'S WORLD MARKET OVERVIEW
Friday closing world markets: TSE, London and Asian markets down, Dow up
Asia's economic troubles and warnings of a weaker domestic economy dragged Canada's leading stock index lower Friday while American stocks eked out a modest gain.
Asian stock markets ended the week lower Friday. European shares fell for a second consecutive session Friday to end little changed on the week as developments in the Japanese economic crisis seemed destined to come to a head over the weekend.
CANADA
Weakness in the heavily weighted natural resource sectors forced Toronto's key equities index to close lower on Friday after a day of modest turnover.
The financial turmoil that has roiled Asian markets is threatening to take its toll on North American earnings reports and domestic activity, sending many investors to the security of the bond market, said Aron Gampel, an economist with the Bank of Nova Scotia.
Asia has bolstered the U.S. money market and weakened other world currencies, including the Canadian dollar, which set a new record low Friday of 67.63 cents US.
Adding insult to injury was a Statistics Canada report Friday that said the Canadian economy created 36,000 fewer jobs in June, another sign that Asia is taking its toll.
And then there's the impact on commodity prices, which are causing the TSE's three primary natural resources sub-groups - gold and silver, oil and gas and paper and forest products - to slide.
''I think people are marking time waiting for the Japanese election and more details on Japanese intentions about tax cuts,'' said Subodh Kumar, chief strategist at CIBC Wood Gundy Inc. ''The weaker Canadian dollar is causing some concerns about interest rates.''
''We've got a bit of profit-taking as the week's coming in,'' said Keith Giles of Credit Suisse First Boston.
Toronto extended recent losses in ''another ugly day,'' said Josef Schachter, head of Schachter Asset Management.''
''People were saying 'let me out, let me out,' '' Schachter said. ''You saw a lot of panic selling. ''Investors are looking forward to a slew of quarterly company results next week, which could prod Toronto to reverse direction if the numbers look good. That could take the downward pressure coming from the resource sectors off the market, Schachter added.
The Toronto Stock Exchange 300 Composite Index slipped 23.43 points or 0.32% to close at 7389.72 points. Trading was moderate at 93.6 million shares valued at C$2.1 billion. Declines beat out advances 560 to 398 while 321 closed flat. tse.com
The TSE 35 fell 0.5% or 1.99 to 403.62. The TSE 100 lost 0.3% or 1.56 points to 452.51 and the TSE 200 gave up 0.2% or 0.82 to 428.20.
Influential groups such as gold and precious minerals, base metals and oils were the focus of attention on Canada's largest stock market as underlying gold bullion and resource prices dipped. London spot gold fell sharply mainly on selling by one London bank. It dropped through the US$290 per ounce technical support level. The metal fixed at US$290.65.
Gold and precious metals led 10 of 14 sub-groups lower with a dip of 1.3%, followed by oil and gas, down 0.7%. The paper and forestry sub-group slipped 0.4%, metals and minerals 0.4%, consumer products 0.4%, Financial services 0.4% conglomerates 0.4%, Utilities 0.3%, pipelines 0.2% and industrial products 0.2%.
Gold producer Franco-Nevada Mining fell $1.20 to $29.55, while Barrick Gold Corp. slid $0.30 to $26.80. Placer Dome Inc. lost $0.15 to $16.25.
The TSE oil and gas composite sub-components were mixed. The integrated oil's gained 0.4% or 33.29 higher to 8444.60. The oil and gas producers fell 1.1% or 59.94 to 5395.40 and the oil & gas services fell 1.5% or 34.67 to 2277.86.
Only Alberta Energy and Petro-Canada were among the top 50 most active issues on the TSE. Among service issues, Bonus Resource Services was also listed.
Alberta Energy gained $0.75 to $36.05 and Gulfstream Resources $0.64 to $4.39. Several service issues were listed among the top net gainers and included Enerflex Systems $1.50 to $36.50, American Eco $1.00 to $6.25, NQL Drilling $1.00 to $9.00, CE Franklin $0.85 to $6.75 and Ryan Energy $0.50 to $6.25.
On the downside, Talisman Energy fell $1.80 to 40.85, Pacalta Resources $0.60 to $9.15 and Renaissance Energy $0.55 to $22.65. Among service issues, Dreco Energy Services fell $1.75 to $38.05 and Precision Drilling $0.65 to $25.85.
Gentry Resources Ltd. and Gulf Canada Resources Ltd. abandoned a deal that would have given Gulf a stake in the junior in return for Canadian and overseas properties. Gulf shares (GOU/TSE) were down 25› to $6.65 Friday and Gentry's stock (GNYb/TSE) fell 5› to 80›.
Index charts:
TSE 300.......... canoe.quote.com
O&G Composite. chart.canada-stockwatch.com
Integrated Oil's.... chart.canada-stockwatch.com
O&G Producers.. chart.canada-stockwatch.com
O&G Services..... chart.canada-stockwatch.com
New PHLX Oil Services
bigcharts.com.
lonestar.texas.net
Among industrials, newly created Nova Corp. (NCX/TSE) plunged 10%, closing at $26.60, down $2.40. Nervous investors bailed out of Nova Corp.'s chemical business Friday on news the spun-off company won't meet its profit target for the year. About 6.4 million shares were traded on the Toronto (2nd most active issue) and Montreal exchanges, more than six times the daily average since June 22 when they began trading on a when-issued basis.
Among mines, Rio Algom rose $0.80 to $20.85. Inmet Mining Corp. (IMN/TSE) closed down $0.05 to $4.55 in actively trading after Zemex Corp. (ZMX/NYSE) asked Inmet shareholders a C$4.50 per share cash distribution.
On the upside, transportation and environmental services stocks were up 1.1%, followed by real estate, up 0.4%, communications and media 0.4% and merchandising also edged less than 0.1% to the upside.
Laidlaw Inc. (LDM/TSE) led the most actives, up C$0.50 to C$15.50 on well received third quarterly results. Late on Thursday, the transportation giant reported earnings per share of $0.51 versus year-ago loss of $0.20 a share. Canadian National Railway also rose $0.35 to $79.25.
Real estate giant TrizecHahn climbed $0.50 to $34.25. The company struck a $500 million financing deal with Goldman Sachs Canada Inc. on Friday, the same day the merchant banker's New York office upgraded its rating on the Toronto based company's stock.
CanWest Global Communications Corp. led media stocks higher with a gain of $1.00 to $26.50.
Leading weekly gainers was Pipelines - a small sub-group dominated by powerhouses IPL Energy and TransCanada PipeLines - bouncing up a whopping 55.93% after a dismal performance last week.
Mines and minerals slumped 2.82%, followed by gold and silver, down 1.89%. The conglomerates sub-group dropped 1.36%.
For the week, the oil & gas composite index lost 1.0% or 64.23points from 5123.57. Among sub-components, the integrated oils fell 0.9% or 80.84 from 8525.44. The oil & gas producers lost 0.7% or 38.21 from 5433.61 and the oil and gas service group continued to be under heavy pressure, losing 4.3% or 103.42 from 2381.28.
Most surprisingly on Friday, the Alberta Stock Exchange - loaded with resource issues, experienced one of its stronger sessions in many days. The combined value index gained 16.71 to 2113.47. Gainers outnumbered losers 149 to 113 with another 92 issues remaining unchanged.
Oil & gas related issues among the 25 most active issues included Colt Energy, Green River Petroleum, Oilexco, Anvil Resources, Parkcrest Exploration, Alta Pacific Capital and Scimitar Hydrocarbons.
Red Sea Oil gained $0.23 to $1.88, Request Seismic $0.15 to $1.90, CanBaikal Resources $0.13 to $0.65, Corridor Resources $0.10 to $1.00, Edge Energy $0.10 to $3.95, Northline Energy $0.10 to $1.50 and Niko Resources $0.10 to $4.50.
On the flipside, Draig Energy fell $0.14 to $1.46, Alma Oil & Gas 0.10 to $0.30, Belfast Petroleum $0.10 to $2.20, Energy North $0.10 to $0.30, Praire Pacific Energy $0.10 to $0.30 and Solid Resources $0.10 to $7.10.
Canada's dollar slumped on Friday to a record closing low of C$1.4783 (US$0.6765), after touching a new intra-day low of C$1.4800 (US$0.6757) in gradual selling triggered by the nation's weak jobs data.
There was no indication of market intervention or an exchange rate check by Canada's central bank to stem a further decline in the currency, which has been fairly orderly.
''We tested the C$1.48 big figure level, but did not breach it. The market is certainly poised to move through that price point next week,'' one risk manager said. ''The basic mood is still bearish and the Bank of Canada has been noticeably quiet, or totally absent from the market not only in terms of intervention but in terms of commenting.''
''There's not a real sense of panic yet in the currency being sold off,'' another trader said, adding that market players were leaving for home with either square or small U.S. dollar long (buy) positions in spot, short-term trading.
''I think some people may be looking out to put on long Canada positions on a longer-term basis, maybe constructing their positions for option plays,'' he said.
Economists and market participants expect Canada's central bank to hold off raising its key lending rate for a while. Such a move would would be expected to lure investors into Canadian assets, boosting dollar demand.
The currency took another hit in typically thin summer trading in North America as traders, who had expected some growth in job creation, renewed Canadian dollar selling on early morning news that employment in Canada fell for the second consecutive month in June.
Total employment fell by 35,900 to 14.24 million with most declines recorded in the agricultural sector, after a drop of 7,300 in May. The jobless rate was unchanged at 8.4 percent.
Canadians may see more weakness on the jobs front in July as the impact of the General Motors plant shutdowns in North America was not fully reflected in the latest data.
''The Canadian dollar story has been a global story until today. The weakness in the exchange rate was clearly reflecting the weakness in the commodities prices, which are relevant to Canada,'' said Andrew Spence, senior economist at Deutsche Bank Securities. ''However, we're beginning to see signs of slowdown domestically, and the question is if that slowdown is temporary or something more permanent.''
Canada's bearish jobs report came on the heels of Thursday's news of a 4.6 percent drop in June housing starts, making the third consecutive month of declines. Construction industry strikes in the key province of Ontario were blamed.
In cross trading, Canada fell to 1.2283 marks from 1.2390 marks at the previous close here, and to 95.44 yen from 95.53 yen, moving in tight ranges in response to the U.S. dollar's fluctuations against the mark and yen.
The U.S. dollar fell to mid-1.81 mark levels as the market turned optimistic from Thursday's more pessimistic views on Russia's tackling economic challenges and its talks with the International Monetary Fund for receiving loans. This pulled the currency down to 140 yen before it rebounded to around 141 yen.
Japan's ruling party under Prime Minister Ryutaro Hashimoto would survive the Upper House election on Sunday and deliver on promised fiscal stimulus measures.
The Canadian dollar is vulnerable to safe-haven capital flows to the United States. The U.S. dollar has in the past firmed against all major currencies at times when there was concern over the world's troubled regions, such as Asia and Russia.
The market was a bit jittery ahead of the 0900 EDT/1300 GMT window for Bank of Canada money market operations this morning, although most traders believed that the central bank would hold back from raising its key lending rate.
The central bank published its weekly monetary conditions index (MCI) data, which showed the nation's overall money conditions loosening to -5.83 from -5.78 a week ago.
Canadian bonds ended flat on Friday, recovering some earlier losses in thin trading.
The long end of the yield curve scored a minor gain, ignoring a drop in U.S. long bond prices, while the short end escaped heavy selling despite a slide in the Canadian dollar to record lows.
''The weakness in the currency is not too problematic to the long end of the curve,'' said Rob Palombi, senior fixed-income analyst at Standard & Poor's MMS. ''The depreciation of the currency is still fairly orderly and the possibility of a 25 to 50 basis point rate hike is already priced into the front end. So overall, we're outperforming the U.S. a little bit.
Canada's benchmark 30-year bond, after an initial drop, rose C$0.10 to C$136.90, yielding 5.449 percent.
In contrast, the U.S. 30-year bond fell 8/32 to yield 5.63 percent. The U.S.-Canada spread was 18 basis points after 16 points at the previous close here.
Economists expect Canada's central bank to hold off on raising its key lending rate to defend the local currency by offering investors higher returns on Canadian assets.
''Definitely weaker on the front end of Canada, thanks to the weak jobs report and record low on the currency,'' said Jeoff Hall, managing Canadian market analyst at Technical Data in Boston. ''There's a little bit of concern about the Bank of Canada coming in, but I don't think anybody really put much stock in that.''
Canada's dollar slumped on Friday to a record closing low of C$1.4783 (US$0.6765), after touching a new intra-day low of C$1.4800 (US$0.6757) in gradual selling triggered by the nation's weak jobs data.
Employment in Canada fell for the second consecutive month in June, by 35,900 to 14.24 million with most declines in the farm sector, after a drop of 7,300 in May. Economists on average had forecast employment rising 26,000. The full impact of the General Motors strike is expected to be felt in the July jobs data.
After the release of the U.S. producer price index this morning, U.S. treasuries eased as the core rate rose a bigger-than-expected 0.2 percent in June.
The overall PPI showed a benign inflation picture, falling 0.1 percent, however.
Economists had forecast the overall PPI unchanged after a 0.2-percent rise in May. The core rate, excluding food and energy prices, was forecast to be rising 0.1 percent after a 0.2-percent rise.
Canada's 30-year bond surged to a record high of C$137.43 on Tuesday in light of speculative buying. Its yield fell to a record low of 5.421 percent.
For now, eyes are on the U.S. dollar's strength versus the German and Japanese currencies, which affects the price action in the Canadian dollar and bonds.
''Next week we could see renewed volatility in the dollar/yen and that would bring back a safe-haven bid for treasuries,'' Palombi said, adding that Canada should benefit from flight to quality capital flows to North American assets.
The U.S. dollar has been swinging back and forth as market sentiment moves between optimistic and pessimistic on Russia's bid to iron out financial problems with the help of an international aid package under negotiations, and hopes of Japan's effective tax cuts emerge and subside.
Financial markets remained wary on uncertainty over the prospect of Japan's ruling party under Prime Minister Ryutaro Hashimoto surviving the Upper House election on Sunday and delivering on promised fiscal stimulus measures.
Hashimoto meets the press at 1400 JST/0500 GMT/0100 EDT on Monday, to discuss the outcome of the election.
The money market was steady despite a continuous fall in the Canadian dollar against the U.S. dollar.
''A majority is still investing in the short end,'' one trader said. ''A generally accepted view is that the central bank is not going to raise the bank rate initially, for some time.''
Canada's three-month when issued T-bill traded with a yield of 4.82 percent after 4.83 percent at the previous close here.
''People are just staying put and we're in the doldrums in the summer, barring any major overseas event,'' the trader said.
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