MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING TUESDAY JULY 15, 1998 (1)
MARKET OVERVIEW
U.S. stocks ended on a mixed note Wednesday as investors took profits from the rally in blue chips, but the technology laced Nasdaq market roared ahead to its sixth record close in a row.
The mood of investors turned sour late in the afternoon as the Toronto stock market gave up almost all of its earlier gains by the close of trading Wednesday.
Most Asian stocks closed higher Wednesday, buoyed by optimism that Tokyo's new leadership will get the ailing Japanese economy back on track.
CANADA
Toronto's main equities index gave back meager early gains on Wednesday and closed steady with Thursday's finish, saved from a fall by the energy and real estate sectors. Stocks were mixed as gains by Canadian Pacific Ltd. and oil producers were offset by a drop in retailers and gold issues.
''Oils were the winners today after the OPEC announcement,'' said Josef Schachter, head of Schachter Asset Management. Major oil producers in the Organization of Petroleum Exporting Countries have given indications that they will follow thorough on promised cuts, he said.
"One of the things that continues to bother this market is the action of the dollar," said Fred Ketchen, senior vice-president at ScotiaMcLeod in Toronto. The loonie plunged two-fifths of a cent Wednesday to 67.15 cents US, its fifth all-time closing low in as many business days. "People are being mesmerized by the whole darn problem," said Ketchen, referring to fears of a chaotic currency free-fall. That would force the Bank of Canada to raise interest rates to defend the dollar, putting pressure on interest-sensitive stocks, such as utilities and the banks.
The TSE 300 composite index slid sideways Wednesday, gaining only 1.07 points to close at 7,388.13. Earlier in the day, the index soared as high as 7422. About 100.2 million shares changed hands on the TSE, up from 98.8 million shares traded Tuesday. Decliners outnumbered advancers 547 to 465 with 301 unchanged in trading worth just under $2 billion.
"There really was a negative bias towards the close," said Ketchen. "Some of the sectors in Toronto that were strong reversed themselves."
Other key indicators were mixed. The TSE 35 fell 0.1%, the TSE 100 0.1% while the TSE 200 managed to gain 0.3%.
Winners included real estate, up 1.5%, oil and gas 1.0%, conglomerates 0.7%, industrial products 0.1% and financial services 0.1%.
Among issues in the real estate sector, TrizecHahn gained 50 cents at $34.65.
Banks and other financial services stocks helped pull the index from its high as they gave up early gains as the C$ plummeted to another record low, sparking fresh concern that monetary authorities will be forced to raise rates to halt the slide. Bank of Nova Scotia (BNS/TSE) fell 20› to $37.70 and Royal Bank of Canada (RY/TSE) lost 30› to $90.70. Canadian Imperial Bank of Commerce (CM/TSE) rose C$0.55 to C$49.80 after the Competition Bureau said it would examine the Bank of Montreal (BMO/TSE) and Royal Bank of Canada (RY/TSE) merger at the same time as the Toronto-Dominion (TD/TSE) and Canadian Imperial Bank of Commerce merger despite the time lag in the TD-CIBC announcement.
Cude oil rose US $0.32 to US $14.87 a barrel on the New York Mercantile Exchange. If strong demand continues, it could reduce inventories just as oil producers are cutting output. Among the sub-components of the TSE oil & gas composite index, the integrated oils gained 0.8% or 68.88 to 8441.30 and the oil and gas producers rose 0.9%. The battered oil & gas services gained a whooping 3.3% or 73.84 to 2291.34.
Suncor will report its second quarter earnings today. The oil refiner is expected to earn $0.39 a share, according to the average estimate of analysts polled by First Call Corp. It earned $0.26 a share in the same period a year ago. PanCanadian Petroleum also is due to report earnings today. PanCanadian shares (PCP/TSE) closed unchanged at $22.00.
Canrise Resources, Crestar Energy, Northrock Resources, Newport Petroleum, Tarragon Oil & Gas, Northstar Energy, Poco Petroleums, Gulf Canada Resources and Westfort Energy were among the top 50 most active traded issues on the TSE. Also among the most actives were the service issues of Canadian Fracmaster and Tesco.
On the upside, Talisman Energy gained $0.80 to $41.05, Poco Petroleums $0.60 to $15.70, Startech Energy $0.60 to $5.55 and Suncor Energy $0.60. Among service issues, Dreco Energy Services gained $2.20 to $39.05, Tesco $1.20 to $13.85, Precision Drilling $1.05 to $26.45 and Shaw Industries A $0.70 to $17.70.
Top losers included Northrock Resources, down $0.75 to $16.50, Chieftain International $0.60 to $32.90 and Paramount Resources $0.50 to $13.50. Among service issues, Ryan Energy Technologies fell $0.50 to $5.25.
Stocks in the conglomerates sector, which added 0.7%, also posted respectable gains. Canadian Pacific (CP/TSE) rose $0.80 to $39.00 on optimism that profit will grow at its 87% owned PanCanadian Petroleum Ltd. unit.
Nine of the 14 sub-indexes finished lower.
The biggest loser in Toronto was the merchandising sector, which lost 1.2% as Hudson's Bay lost $1.30 at $31.80. Loblaws was down $0.80 at $36.00 and George Weston was down $0.75 to $54.25.
Gold stocks were beaten down 1.0%. Barrick Gold dropped $0.35 to $26.55. Placer Dome was down $0.25 to $16.05, while Franco-Nevada rose $0.30 to $29.30.
Paper and forest products was the third largest lose, falling 0.5%, followed by utilities 0.4%, consumer products 0.3% and pipelines 0.3%.
Among hot stocks, Lumonics Inc. (LUM/TO) plunged as it joined a growing list of Canadian semiconductor-related firms hard hit by Asia's economic crisis. Lumonics, which develops and makes laser-based manufacturing systems for the semiconductor, electronics and other markets, lost one quarter of its stock value, falling C$3.25 to C$9.75. It warned it would post a C$3.6 million loss before taxes in the second quarter as its cautious North American customers hold off on capital equipment expenditures due to uncertainty over the health of their markets in the Far East.
Canadian Tire Corp. (CTRA/TSE) fell 65› to $42 to lead retailers lower on expectations that a lower C$ will raise the cost of imports, and decrease profits.
Other Canadian markets ended lower. The Montreal Exchange portfolio slipped four points to 3746.44. The Vancouver Stock Exchange fell 5.81 points, or 1.1%, to 514.23.
The Alberta Stock Exchange's combined value index nosedived 39.90 to 2106.05. Declining issues overwhelmed gainers 217 to 92 with another 116 unchanged.
Oil related issues among the top 25 most active included Anvil Resources, Alta Pacific Capital, Cirque Energy, Raptor Capital and First Star Energy.
Top gainers included Solid Resources $0.25 to $7.10, Stellarton Energy $0.24 to $2.74, BW Technologies $0.10 to $3.95 and Cirque Energy $0.10 to $2.50.
On the flipside, Newquest Energy B fell $0.50 to $5.75, Granger Energy A $0.25 to $0.50, Red Sea Oil $0.20 to $1.65, Niko Resources $0.15 to $4.25, Slade Energy $0.12 to $0.63, Wild Horse Resources $0.12 to $0.12, Invader Exploration $0.10 to $0.55 and Petro-Reef Resources $0.10 to $0.40.
Canada Dollar Continues Historic Slide
The Canadian dollar on Wednesday ended at a record closing low of C$1.4890 (US$0.6716) against the U.S. dollar as signs of slower domestic economic growth weighed on the already weak local dollar.
The Canadian unit, which has been sliding constantly for the past four months, had hit a record trading low of C$1.4895 (US$0.6714) earlier in the afternoon despite intervention by the Bank of Canada to slow the pace of depreciation. The intervention started at C$1.4870 (US$0.6725).
After opening at C$1.4816 (US$0.6749) on Wednesday, Canada's dollar came under downward pressure from another set of weaker-than-expected economic data.
May manufacturing shipments fell 1.0 percent after a revised drop of 0.7 percent in April, while economists had forecast a 0.6-percent rise. May car sales came in lower than expected, rising 1.1 percent after a 5.9-percent rise in April.
In cross trading, the Canadian unit continued to slip to 1.2086 marks from 1.2163 marks at the previous close here, and was down slightly at 94.37 yen after 94.46 yen.
"It's pretty bearish. The comment from Ottawa did not help yesterday. They are not showing any particular concern in the currency," one trader said.
Canada's Prime Minister Jean Chretien told reporters on Tuesday that a cheap currency actually helps exports and tourism. "It's not a question of being happy. It's a reality of life," he said.
On the chart, the market has broken through the top of a two-week bull channel for the U.S. dollar against Canada, signifying the acceleration of the move, said Mark Roberts, FX technical analyst at I.D.E.A in New York.
"This should take us up to a larger channel, which has been in operation for four months, and resistance for that is up at C$1.4950 (US$0.6689). I look for it to get up there for the next one to two days," he said.
At that level, there might be a pullback or small consolidation before the U.S. dollar targets C$1.5000 (US$0.6667), a psychological barrier, he said.
Interim resistance at 1.4855 (US$0.6732) on the way up to the current level offers the U.S. dollar immediate support.
The market always speculates for a key lending rate increase by the Bank of Canada as a means of defending the battered currency, but analysts are skeptical about the effect of such action.
"Historical relationships suggest that higher interest rates have only limited impact," said Mark Chandler, senior economist at Goldman Sachs Canada. "A 100-basis point increase in Canada-U.S. short term interest rate spreads typically leads to less than a one-percent appreciationin the Canadian dollar."
"Our best guess is that the bank will indeed hold rates constant through the end of the year," he wrote in a commentary.
He argues that the depreciation of the loonie has provided an offset to a decline in commodities prices, which would have otherwise been felt in employment. Commodities still account for nearly 40 percent of Canada's total exports.
The central bank has indicated that wider fluctuations of monetary conditions are expected in Canada. It is watching movements in the nation's short-term interest rates and the currency's performance against other Group of 10 currencies for any signs of drastic easing in overall money conditions.
In theory, if Canada raised domestic interest rates, it might be able to reverse the flow of capital to the U.S., at least partly, and boost the value of the Canadian dollar.
But external factors, such as concern over Asia and Russia, affect the currency and a rate hike would not be warranted when some economic indicators are showing signs of slowdown.
Last week, the Canadian unit came under heavy selling pressure after the nation's employment fell for the second consecutive month in June, by 35,900 to 14.24 million after a drop of 7,300 in May. Housing starts dropped 4.6 percent in June, the third straight month of declines.
Canada Bonds End Weaker Despite U.S Gains
Canadian bonds ended weaker on Wednesday despite a rebound in U.S. treasuries.
The front end of the Canadian yield curve stayed depressed as the Canadian dollar continued to slide, ending at a record closing low of C$1.4890 (US$0.6716).
The long end of the yield curve pared earlier mild gains from weak domestic economic data.
U.S. treasuries trimmed losses from technical selling earlier this week.
Canada's benchmark 30-year bond fell C$0.45 to C$135.42, yielding 5.529 percent.
The U.S. 30-year bond rose 7/32, yielding 5.71 percent. The U.S.-Canada spread was 18 basis points after 22 points at the previous close here.
"Bonds are beginning to bear the brunt of weakness in the Canadian dollar and today's underperformance reflects assumption that the (central) bank is ultimately going to have to raise rates to defend the currency," said Rob Palombi, senior fixed-income analyst at Standard & Poor's MMS.
Canadian dollar selling momentum appears to be stepping up and the outlook is bearish for the currency, he said.
A higher interest rate should stabilize the currency for a short period of time, and after that it depends on how events unfold for the U.S. and Canadian economies, he added.
U.S. dollar/yen trade, which has influenced North American bonds recently, has lost clear direction due to uncertainty over Japan's economic policy and its impact on Asia.
Japan's ruling party is in the process of picking a new leader to succeed outgoing Prime Minister Ryutaro Hashimoto, but the choice seems to be limited. The market is cautious about how drastic and swift the next leader can be in tackling Japan's banking problems and economic slump.
Canada's economic indicators released this morning weighed on the currency and short-term bonds.
May manufacturing shipments fell 1.0 percent after a revised drop of 0.7 percent in April, while economists had forecast a 0.6-percent rise. May car sales came in lower than expected, rising 1.1 percent after a 5.9-percent rise in April.
The money market was weakening fast as the Canadian dollar weakened by 85 points from Wednesday's close to a day's low of C$1.4895.
"We are weakening off here. The currency was hitting new lows at every passing minute. The bank's been intervening on the currency's side, but it seems to be going through those intervention points," said Walter Posiewko, money market trader at Royal Bank Investment Management Inc.
Canada's three-month when issued T-bill traded with a yield of 4.95 percent after 8.48 percent at the previous close here.
The Bank of Canada set special purchase/resale agreements at 5.0 percent to relieve technical pressure on the overnight rate, traders said.
They said there was no change in the central bank's monetary policy stance. The bank was trying to maintain the call rate within its target range of 4.5-5.0 percent.
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