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OPTIMA RESEARCH INVESTMENT, INC.
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Friday 7/17/98 -- Americas Comment -- The US markets today
will focus on (1) any overnight developments in the Asian and
Russian financial markets, (2) today's release of the US May goods
and services trade deficit report and the early July consumer
sentiment index from the University of Michigan, (3) the US
Treasury market which settled mildly softer yesterday, pressured by
the weakness in the dollar, (4) the dollar which settled sharply
lower as the Russian Duma approved 14 of the 16 tax bills needed to
comply with IMF assistance, and as reformist Seiroku Kajiyama made
noises about running for the premiership, (5) the US stock market
which settled sharply higher as several indexes posted all-time
highs, and (6) the CRB index which closed little changed yesterday.
Today's release of the May goods and services trade deficit is
expected to post a -$14.3 billion gap, little changed from April's
record -$14.5 billion deficit. Expectations for a steady trade
deficit stem from the likelihood that upward pressure on imports
will be at least partly offset by falling oil prices. On the
export side of the coin, expectations call for a rebound in
aircraft shipments which will give overall exports a needed boost.
Still, any narrowing of the trade gap in May should not be seen as
the start of a trend. The US trade deficit is poised to continue
to widen due to (1) the impact of the Asian crisis, (2) the
strength of the dollar, and (3) the strong domestic demand in the
US economy which is sucking in imports.
US June industrial production slides due to GM strike -- June
industrial production fell by -0.6%, mildly weaker than
expectations for a -0.4% decline. May industrial production was
revised mildly softer to +0.3% from the previous report of +0.5%.
The -0.6% drop in June production was the sharpest in 7-1/4 years.
On a year-on-year basis, June industrial production slowed to +3.7%
(the smallest increase in 1-3/4 years) from May's +4.5% (yr-yr)
gain.
The Fed said that the decline in June industrial production
was tied to "ongoing strikes" in the auto industry. That was
clearly seen in the -0.6% drop in June manufacturing output
following May's unchanged report. The -0.6% tumble in
manufacturing production was tied largely to a -11.0% plunge in
motor vehicle output. That more than reversed May's +2.0%
increase. Excluding autos, June manufacturing output climbed by
+0.1%. Production of consumer goods fell by -1.2% and output of
construction materials fell by -0.3%, while production of business
equipment was unchanged.
June utility production climbed by +0.4%, adding to May's
+2.4% increase. June mining production fell by -2.0%, more than
reversing May's +0.9% advance.
The June capacity utilization rate fell by -0.8 points to a
new 4-2/3 year low of 81.6%. The May rate was revised a bit higher
to 82.4% from the earlier report of 82.2%. At 81.6%, the capacity
utilization rate has now fallen by a total of 3.0 points from the
Jan 1995 9-year peak of 84.6%.
As expected, the drop in the capacity rate was tied to the GM
strikes. The June manufacturing rate fell by -0.8 points to a
4-3/4 year low of 80.3%, as the rate for auto plants fell by -8.4
points to 65.6%.
Yesterday's June industrial production report was certainly on
the weak side. As expected, much of that weakness was tied to the
impact of the 6-week old strikes at two GM auto parts plants in
Flint, MI. That was seen in the -11.0% plunge in vehicle output.
That also weighed on production of business equipment (trucks) and
consumer goods (cars and light trucks).
Moreover, the slight +0.1% increase in non-auto manufacturing
output was on the soft side as well. While output of industrial
machinery (+1.2%), electrical machinery (+0.3%), and semiconductors
(+0.8%) all posted gains, production of lumber products (-0.3%) and
furniture (-0.3%) declined. The drop in lumber product output
could be tied to the impact of the Asian crisis as exports to the
region dry up along with building activity in the affected nations.
Furthermore, the slowdown in non-auto production is probably a
reflection of the effort among manufacturers to brake inventory
growth, fearful of a further slowdown in export activity and
possibly even domestic spending.
Still, the fact that the inventory-to-sales ratio in the US
economy remains rather tight suggests that any effort to pare
inventory growth should be short-lived. Moreover, the GM strike
will eventually be resolved. The shrike will likely cause a very
weak Q2 GDP figure and that will pave the way for a sharp rebound
in economic activity as GM activity resumes and as the inventory
liquidation draws to a close.
That is where the good news on the capacity side of the coin
comes to bear some fruit. The decline in the headline and
manufacturing capacity rates to 4+ year lows in June suggest that
there is little threat of any potentially inflationary bottlenecks
in the production process. That points to favorable price
pressures down the road. Moreover, the growth in capacity in
recent months suggests that when GM gears up once again and when
the inventory reduction phase is completed, there is plenty of
spare capacity to absorb the expected rebound in manufacturing
activity. That is good news for the Fed and the markets.
US initial claims tumble due to seasonal adjustments --
Initial unemployment claims in the week ended July 11th fell by
-58,000 workers to 336,000. That marked a new 4-week low in the
series and was much lower than expectations for a reading of
370,000 workers. The previous week's report was revised a bit
higher to 394,000 workers from the earlier report of 392,000
workers. The 4-week moving average climbed by +1,250 workers to
372,500 workers. In the week ended July 4th, the number of
continuing claims fell by -8,000 workers to 2.397 million. The
4-week moving average, however, climbed by +72,500 workers to
2,292,750 workers.
The surprise drop in initial claims in the latest week is
solely tied to seasonal adjustments. This is normally the time of
year when US auto workers are temporarily laid off to let the
company retool assembly lines for the new model year. However, due
to the GM strike, a huge number of auto workers had already been
idled so the increase in initial claims in the latest week was less
than what the seasonal adjustment factor was meant to account for.
If the GM walkout drags on, as appears likely, the initial claims
series will rebound when the seasonal adjustment factor adjusts for
the normal return of auto workers after the retooling process.
That usually takes about 2 weeks.
For what it is worth, yesterday's initial unemployment claims
report covered the survey week for the July unemployment report.
The 4-week moving average for initial claims climbed by +49,500
workers in the period between the survey weeks for the June and
July reports. Thus far, with 1 week to go, the 4-week average for
continuing claims climbed by +161,750 workers. While those huge
increases could be seen as evidence of a weaker labor market, they
are, in fact, simply evidence of the impact of the GM strike on the
initial claims series. The markets will now look ahead to the
Labor Department's strike report for July which will be released
about a week ahead of the Aug 7th release date for the July
unemployment report.
US Philadelphia Fed manufacturing index weakens in July -- The
Philadelphia Fed yesterday reported that its July manufacturing
index fell by -16.6 points to 11.6. That pointed to a sharp
slowdown in the district's manufacturing activity. The employment
index fell by -3.4 points to 4.5 and the new orders index fell by
-15.1 points to 7.5. There was favorable news on the inflation
front as the prices received for finished goods index fell by 4.7
points to -5.8, while the prices paid for raw materials index fell
by 8.2 points to -2.1. The future activity index plunged by 12.6
points to -13.1.
The weakness in yesterday's Philly Fed report points to
softness in the district's manufacturing activity. That could be
tied to the impact of the GM strike on other auto-related
manufacturers within the district as well as the impact of the
Asian crisis on export activity and the effort to hold down
inventories. Yesterday's Philly Fed report sets the tone for
expectations for a soft reading in the Chicago Purchasing Managers
report due on July 31st.
US Interest Rates -- US credit market settles mildly softer,
pressured by weaker dollar -- Sep T-bonds yesterday sold off in
European trading, mirroring the slide in the dollar, spiked higher
after the release of the soft June industrial production and July
Philly Fed reports, but tailed off once again to close mildly
weaker. Futures closes: USU98 -0-09 at 122-07; TYU98 -0-04 at
113-18; FVU98 -0-040 at 109-195; TUU98 -0-015 at 104-060; TBU98
+.005 at 94.970; EDZ98 -.005 at 94.280. Cash closes (3PM NY): cash
30-yr -0-08 at 105-23; cash 30-yr yield +.017 at 5.720; cash 10-yr
-0-05 at 100-31; cash 10-yr yield +.020 at 5.496; cash 5-yr -0-04
at 99-17; cash 5-yr yield +.029 at 5.485; cash 2-yr -0-010 at
99-280; cash 2-yr yield +.017 at 5.433; 3-mo T-bill +.032 at 5.031.
Sep T-bonds yesterday slipped to a new 4-week low of 122-04 as
they consolidated below the contract high of 124-14 (6/16/98). The
cash 30-year bond yield yesterday held below Tuesday's 3-1/2 week
high of 5.733% and closed at 5.720% where it held well above last
Monday's all-time low of 5.570%. On that 5.570% low, the yield
fell by a total of 52.3 bp from the 3-month high of 6.093%
(4/29/98). Dec Euros yesterday held below the 3-1/2 week high of
94.335 (7/2/98) where, in turn, it held below the 2-1/2 month high
of 94.370 (6/30/98).
Bearish factors included (1) the unwinding of some flight-to-
quality positions in Treasuries amid optimism surrounding the
situation in Japan (and, by extension in Asia) and in Russia, (2)
the slide in the dollar, (3) long liquidation pressures with the
new 4-week low in Sep T-bonds, and (4) this week's upward push in
share prices which may also be drawing capital out of the Treasury
market. Bullish factors yesterday centered on the weakness in the
June industrial production report and July Philly Fed index which
may trigger additional downward revisions to forecasts for Q2 GDP
growth.
Fed may conduct a weekend system repo -- The Fed may conduct
an over-the-weekend system repo operation in order to address its
add need in the new 2-week maintenance period that began yesterday.
The Fed faces a modest $2-$4 billion per day add need in the new
2-week period. That add need is fueled largely by high levels of
currency in circulation as the summer vacation season remains in
high gear. Moreover, the Fed will need to replace yesterday's
$3.717 billion overnight system repo which expires today. That
operation was conducted with the funds rate trading at 5-9/16%, a
bit above the 5-1/2% target.
US Stock Market -- The US stock market yesterday opened
slightly higher, dipped to the session low and then settled into a
steady uptrend to finally settle with modest gains. Settlements
were: Dow Industrials +93.72 at 9328.19, DJU98 +87 at 9392, Dow
Utilities +1.44 at 292.31, OEX +3.64 at 579.33, S&P 500 +9.21 at
1184.02, SPU98 +7.80 at 1191.20, NASDAQ Composite +6.02 at 2000.56,
and the Russell 2000 +1.66 at 463.64. The Dow, the OEX, the S&P
500 (cash and futures) and the NASDAQ all closed at all-time highs
yesterday.
Stock market breadth was bullish yesterday with advancing
issues (1,707) leading declining issues (1,212) by a 7 to 5 margin.
Yesterday's volume was heavy at 677 million shares while declining
volume accounted for 35% of the total. The percentage of NYSE
stocks above their 200-day averages was unchanged at 50% where it
was down a bit from last Friday's 1-1/2 month high of 52%. That
reading in turn was up from June 22nd's 3-1/2 year low of 42%. The
number of shares posting new 52-week highs (330) exceeded the
number posting new 52-week lows (248).
The blue-chips were yesterday's best performing group as the
Dow logged a 1.02% gain. The S&P 500 followed with a .78% advance
while the Russell 200 and the NASDAQ rose .36% and .30%
respectively. For the year-to-date, the NASDAQ is in first place
with a 27.4% gain followed by the S&P 500 at +22% and the Dow at
+17.96%. The Russell 2000 continues to lag with a 6.09% year-to-
date gain.
Bullish factors included (1) strength in the drug stocks which
have become the most heavily weighted component of the S&P 500,
replacing the international oil companies, (2) technical factors as
the major indexes (except for the Russell 2000) posted new all-time
highs, (3) the better than expected Q2 earnings reports yesterday
from Apple Computer, SBC Communication, Tellabs, and International
Paper, and (4) strength in the technology sector as the NASDAQ
continued to surge higher to post a new all-time high above
psychological resistance at 2000.
Bearish factors for the stock market included (1) supply
concerns with stock issuance remaining strong, according to
Securities Data Company, as $71 billion in common stock and closed
end funds were sold in the first half of 1998 (the second highest
amount in a 6-month period after 1997's second half) while Q2 set
a quarterly record of $43 billion, (2) valuation concerns with the
S&P 500 trading at a record 28.5 times 12-month trailing earnings
and 24.4 times forecasted earnings, and (3) indications that
bullish sentiment is at an extreme level with investment advisor
sentiment surging (see below) and the 10-day average of the
call/put ratio on the OEX at an 8-month high.
Among the companies expected to report Q2 earnings today and
their consensus estimates according to First Call are: Tyco
International ($.51), Case ($1.60), DSC Communications (-$.12), and
Healthsouth ($.28).
Near the top of yesterday's most active list was HBO & Company
(-11%) at 26.84 million shares. The company, which provides
software to the healthcare industry, has fallen 21.74% this week
after breaking off merger talks with McKesson Corp. Apple Computer
(+8.89%) changed hands 22.87 million times and rose to a 2-2/3 year
high after reporting better than expected earnings and announcing
that it expected a pick-up in sales growth in the second half.
Apple is up 185% for the year-to-date and is the best performer
(year-to-date) of all of the S&P 500 stocks.
Yesterday's rally was broad-based with 74 of the S&P 500's 89
sub-groups rising while 15 fell. Market breadth was bullish as 318
of the S&P 500 stocks closed higher while 157 fell. The soft-drink
sub-index was yesterday's worst performing sector on a
capitalization weighted basis as Coca-Cola fell .71%. The company
reported Q2 earnings that met expectations but investors were
disappointed that earnings growth is slowing to below double
digits, especially after boosting share prices over 20% in the past
2-months.
Of the 30 Dow stocks, 23 rose yesterday while 4 fell. Eastman
Kodak (+4-1/2 or +5.45%) was the biggest gainer in the Dow for the
second day following its very favorable Q2 earnings report and
announcement that its slide in market share has been arrested. The
shares have risen 17.97% in the last two sessions. Merck (+1-3/4)
continued its rally following approval by the FDA this week for a
new cholesterol lowering drug. The shares are up 4.43% so far this
week.
The cash S&P 500 posted an all-time high of 1184.00 yesterday
where it continued to climb above the top of its 3-month sideways
trading range that existed between 1133 and 1075. The Russell 2000
posted a new 1-1/2 month high of 463.64 yesterday where it was up
6.91% from its 5-1/2 month low of 433.66 (June 15). The small-cap
index, however, remains well below its all-time high of 492.28 that
was posted on April 22. The Dow Industrials index posted a new
all-time high yesterday of 9332.31 as it closed decisively above
the 9300 level. The NASDAQ composite index rose to a new all-time
high of 2002.71 yesterday where it was up 16.76% from the Jun 15th
4-1/2 month low of 1715.19.
Investment advisor sentiment flashing warning sign --
Investment advisor sentiment, as measured by the Investors
Intelligence newsletter, rose for the sixth consecutive week and
posted a 2-1/2 month high in the latest survey completed last
Friday. The percentage of advisors who considered themselves
bullish rose to 52.0% where it was up from 47.1% in the previous
week. The percentage that considered themselves bearish, or who
expected a decline of 10% or more, fell to 48.0% where they are now
in the minority. The recent pick-up in advisor sentiment is
flashing a warning sign that bullish sentiment may be overdone.
The percentage is closing in on its 1-2/3 year of 54.6% which was
posted during the week of April 17.
Stock mutual fund inflows pick up and remain strong --
According to Trim Tabs Financial Services, $6.3 billion flowed into
domestic equity funds in the week ended Monday, a week that saw the
S&P 500 rally to new highs. In the previous week, $4.8 billion
flowed in. So far in 1998, mutual fund flows are running about 20%
ahead of 1997's record total and at an average rate of about $1
billion per day. Individual investors can be counted on as a
source of new funds and an extension of the stock market's present
rally can be expected to attract further money.
Commodities -- CRB closes slightly lower with energy sector
tumbling -- The CRB index yesterday closed down -.19 points at
209.95 as it continued to retreat from the Jun 30th 5-week high of
216.75. The major lows on the downside are the recent 5-year low
of 208.54 (6/15/98), the 12-year low of 198.17 (Aug 1992), and the
20-2/3 year low of 196.16 (July 1986). The CRB index is up +.44%
on a month-on-month basis but down -10.29% on a year-on-year basis.
Closes: Energy: CLQ98 -.39 at 14.48; HUQ98 -.0143 at .4551;
HOQ98 -.0081 at .3851; NGQ98 -.101 at 2.130. Precious Metals:
GCQ98 -.5 at 294.0; SIU98 -.3 at 534.0; PLV98 +8.7 at 399.0.
Grains: S X98 +4-2 at 582-2; SMZ98 +3.80 at 155.90; BOZ98 -.28 at
24.71; C Z98 +2-0 at 235-4; W Z98 unch at 285-0. Livestock: LCQ98
+.70 at 62.90; FCQ98 +.62 at 70.67; LHQ98 +.78 at 51.10; PBQ98
+1.65 at 53.10. Softs: SBV98 +.05 at 8.71; KCU98 -.30 at 106.80;
CCU98 +30. at 1587.; JOU98 +1.60 at 106.10. Industrials: CTZ98
-.10 at 72.40; HGU98 +.05 at 76.60; LBU98 -2.90 at 271.60.
Aug natural gas was the CRB's largest decliner yesterday as
the contract fell -.101 to close at 2.130. On yesterday's 1-month
low at 2.130, the contract fell 39 cents (15.48%) from the Jul 1st
2-month high at 2.520. After the close on Wednesday, the American
Gas Association reported that natural gas in storage rose sharply
by +93 billion cubic feet to 2178 billion cubic feet. The storage
level is 25% higher than one year ago. Milder-than-normal weather
during the past winter kept heating use down and brought about an
increase in storage.
Aug crude oil fell -39 cents to close at $14.48. On Jun 15th,
crude oil futures touched a 12-year low of $11.40 on the
weekly-nearest chart (Jul 98 contract). The American Petroleum
Institute reported after the close Tuesday that crude oil
stockpiles fell -6.3 mln barrels to 334.7 mln barrels. The report
demonstrated the first effect of recent OPEC production cuts as
refiners deplete stockpiles purchased at lower prices and offer
products at very favorable margins. Seasonal maintenance work on
North Sea oil platforms is reducing British and Norwegian
production.
Oct platinum was the CRB's biggest winner yesterday as the
contract rose +8.7 to close at $399.0. On yesterday's 2-month high
at 400.0, the contract rose 53.5 dollars (15.44%) from the Jun 15th
contract low of 346.5. Russian supplies of platinum and its sister
metal palladium have been unreliable this year after the Russian
export agency withheld permits until May. Participants are worried
that contracts for physical delivery from Russian sources may not
be carried out. The Russian Central Bank said yesterday that it
will keep some palladium for reserves.
August gold yesterday closed down -.5 at $294.0 and remained
below the psychologically important $300 level. Asian gold demand
is vulnerable to weakening in the Japanese yen with the metal
already expensive in local currency terms. Aug gold posted a 5-3/4
month low of $285.6 on Jun 16th where it extended its 2-1/2 month
downmove to a total of $32.6 (10.25%). The next major line of
support is $283.9, the 18-2/3 year weekly-nearest low. On that
low, August gold was down $60 (17.45%) from its 1-year high of
$343.9 (9/30/97).
Canada -- The June CPI climbed by +0.1% (mo-mo) and by +1.0%
(yr-yr). That was a bit more favorable than expectations for a
+0.2% (mo-mo) and +1.1% (yr-yr) increase, and was down from May's
+0.4% (mo-mo) and +1.1% (yr-yr) advance. Excluding food and energy
prices, the June core CPI fell by -0.1% (mo-mo) and climbed by
+1.0% (yr-yr). That was moderately below forecasts for a +1.3%
(yr-yr) gain and was well below May's +1.4% advance.
At +1.0%, the core CPI is at the bottom of the Bank of
Canada's target band of +1-3%. However, given the weakness in the
Canadian dollar, the Bank is hardly in a position to ease in an
effort to prevent any further deceleration in consumer prices. The
Canadian dollar stands to come under additional downward pressure
with today's release of the May merchandise trade report which is
expected to show a C$900 million surplus, down from April's C$1.2
billion surplus.
The Canadian dollar yesterday closed .23 cents weaker at
C$1.4890/US$, as it fell to another new all-time low of C$1.4900.
The Canadian dollar was pressured by the very favorable June CPI
report which may handcuff any inclination of the BOC to tighten in
an effort to support to flagging currency.
The Sep Canadian bond yesterday settled -.29 points at 124.62
as it fell to a new 2-month low of 124.54 where it sold off by a
total of 1.64 points from the contract high of 126.18 (7/8/98).
The Canadian 10-year cash yield yesterday settled +3.0 bp at 5.403%
as it rebounded farther above last Wednesday's 3-month low of
5.228%. On that low, it was 4.3 bp above the all-time low of
5.190% which was established on Apr 3. The Sep 3-month bankers
acceptance yesterday closed -4 bp at 94.71, as it fell farther
below the 2-1/2 month high of 94.93 (7/3/98).
The Toronto-300 stock index yesterday closed +17.70 points at
7405.80 holding above the 3-month low of 7094.60 (6/15/98). On
that 3-month low, the index was down by 743.10 points (9.5%) from
the all-time high of 7837.70 (3/23/98).
Forex -- Dollar settles sharply weaker as Duma passes 14 of 16
tax bills -- The dollar yesterday sold off steadily throughout the
European session before rebounding a bit in the US session to
finally settled sharply weaker. Dollar closes (3PM NY): cash
dollar index -.55 at 100.82; dlr/yen -.63 at 139.93; dlr/mark
-.0131 at 1.7855; dlr/Swiss -.0090 at 1.5023; stlg/dlr +.0043 at
1.6398; USD/CAD +.0023 at 1.4890. Mark closes: mark/yen +.22 at
78.36; stlg/DM -.0136 at 2.9287; mark/FRF +.0013 at 3.3544;
mark/lira +.50 at 986.81; mark/Swiss +.0011 at .8412. Futures
closes: DXU98 -.59 at 100.58; JYU98 +.0023 at .7202; DMU98 +.0042
at .5621; SFU98 +.0040 at .6698; BPU98 +.0050 at 1.6354; CDU98
-.0011 at .6721; ADU98 +.0080 at .6331.
The dlr/yen yesterday closed -.63 yen, as it consolidated in
the middle of the range established by the recent sell-off from the
7-3/4 year high of 146.73 yen (6/17/98) to the 2-month low of
133.73 yen (6/19/98). The dlr/mark yesterday closed -1.31 pfennigs
at 1.7855 DM, as it fell to a new 4-week low of 1.7851 DM. On
yesterday's low, the dlr/DM sold off by a total of 4.74 pfennigs
from last Thursday's 3-month high of 1.8325 DM.
Bearish factors for the dollar included (1) the emerging
stability in the Russian markets as the Duma approved 14 of the 16
tax law changes needed to comply with the IMF aid package, thereby
underpinning the mark, (2) some continued long liquidation
pressures, (3) talk that former Japanese chief cabinet secretary
Kajiyama may enter the race for the premiership, and (4) persistent
worries about a sharp slowdown in US economic activity in the
second half of the year. Bullish factors for the dollar included
(1) underlying concerns that the political uncertainty in Japan may
further delay the push for a permanent tax cut and a wholesale
clean-up of the banking system, (2) the Canadian June CPI report
which pushed the Canadian dollar to another new all-time low, (3)
expectations for only a token BBK tightening ahead of EMU, and (4)
the underlying strength in US domestic demand.
European Comment -- The European markets today will focus on
(1) today's possible release of the German May trade data and the
June M3 money supply report, (2) the European credit markets which
closed mostly higher yesterday, and (3) the European stock markets
which closed mixed yesterday.
Germany -- The BBK's July monthly report lauded the fact that
the price climate in Germany remains favorable. The report cited
slowing increases in consumer, producer, and import prices.
Moreover, the BBK said that the impact of the April 1st hike in the
value added tax on price pressures appears to have dissipated.
BBK member Sievert yesterday said that there is "no signal at
the moment" to change the BBK's monetary policy stance. He added,
however, that he would like short-term rate convergence to take
place before year-end and not "at the last possible second."
The German credit market closed little changed yesterday.
Bullish factors included the higher US credit market. Bearish
factors included the unwinding of safe haven flows as the economic
outlook in Russia and Japan appeared more positive. The German
credit market is focussed on Jun M3 money supply (May +4.4% y/y)
and the Jun Ifo business climate index.
The 10-year Bund yield yesterday closed -0.3 bp at 4.675%
after posting an all-time low yield of 4.651% last Friday. Liffe
Sep Bunds yesterday closed up +.04 at 108.82 after posting a
contract high of 109.15 on Monday. The Liffe Sep Euromark
yesterday closed up +.005 at 96.400 after posting a contract high
of 96.410 last Friday.
The Dax index yesterday closed down 14 points at 6094 (+.21%)
after posting an all-time high of 6158. The Dax is up +43.4% for
the year to date in mark terms and +44.42% in US dollar terms. A
rally in Siemens (+17.54%), tied to restructuring plans, wasn't
enough to offset a slump in export stocks related to the week-long
plunge in the dollar.
France -- The Bank of France yesterday drained a net 100
million francs from the banking system, leaving its interest rates
unchanged. The key intervention rate stands at 3.30% and the 5 to
10-day repo rate holds at 4.60%.
The French franc yesterday closed .13 centime weaker at 3.3544
francs/DM. The franc has been trading sideways in a narrow range
for the past 6-months, below the all-time high of 3.3297 FF/DM
(2/16). On that all-time high, the franc was 2.42 centimes above
the franc's ERM parity rate of 3.3539 FF/DM.
The French credit market closed mixed yesterday. The Bank of
France auctioned off FFR 14.8 bln in 2-year and 5-year notes. The
2-year notes yielded 4.00% with a 3.85 bid-cover and the 5-year
notes yielded 4.40% with a 2.66 bid-cover. The French credit
market is focussed on Wednesday's May industrial production and May
manufacturing production.
The 10-year Notional yield closed down -0.2 bp at 4.801% after
posting an all-time low yield of 4.758% last Friday. The Sep
Notional bond closed unchanged at 104.82 after posting a contract
high of 105.21 last Friday. The Sep Pibor closed +.005 at 96.380
after posting a contract high at 96.400 last Friday.
The CAC40 stock index yesterday closed 14 points higher at an
all-time high settlement of 4358 (+.32%) after posting a new all-
time high of 4386. The CAC40 is up 45.32% for the year-to-date in
franc terms and up 45.37% in US dollar terms. STMicroelectronics
rose 4.3% and led the CAC40 higher on expectations that the world-
wide slump in semiconductor sales is coming to an end.
UK -- The June Public Sector Net Cash Requirement totaled
6.148 billion sterling, moderately wider than expectations for a
4.0 billion sterling deficit. While the deficit was wider than
expected, it was still narrower than the gap posted a year-earlier
and revenues are expected to increase in July due to new corporate,
income and capital gains taxes rules.
The British Chamber of Commerce's quarterly survey said that
both the service and manufacturing sectors of the economy were
experiencing a serious slowdown in Q2. The manufacturing sector,
the report said, faces a "meltdown" as orders fall. Confidence in
the manufacturing sector has fallen to its lowest level since 1992
while confidence in the service industries is at a 3-year low.
Moreover, the BCC launched a strong attack on the Bank of
England, pleading for a dose of "realism" in the MPC. The BCC was
vehemently opposed to the June tightening.
Sterling yesterday settled -1.36 pfennigs at 2.9287 DM, as it
moved farther below the 2-1/2 month high of 3.0271 DM (7/2/98). On
the 3.0271 DM high, sterling rebounded by a total of 16.54 pfennigs
from the May 22nd 7-1/2 month low of 2.8617 DM but remained 8.29
pfennigs below the 8-3/4 year high of 3.1100 DM (4/3/98).
The UK credit market closed slightly higher yesterday. The
British Chamber of Commerce's quarterly survey said that both the
service and manufacturing sectors of the economy were experiencing
a serious slowdown in Q2. Government spending exceeded revenues by
6.148 billion pounds in June, more than consensus expectations for
a 4.0 billion pound deficit. The UK credit market is focussed on
Monday's Jun M4 money supply and Wednesday's Jun retail sales.
The 10-year gilt yield yesterday closed -1.7 bp at 5.853% and
held below the Jun 19th 1-3/4 month high yield of 5.931%. Sep
gilts yesterday closed up +.12 points at 108.56 where they remained
within the 3-week trading range. Sep short sterling yesterday
closed up +.020 at 92.170 where it remained above the Jun 19th
5-1/2 year low of 92.020.
The FTSE index closed lower by 34.7 points at 6116.8 (-.56%)
after posting a new all-time high of 6180.4. The FTSE is up 19.11%
for the year-to-date in sterling terms and up 18.74% in US dollar
terms.
Asian Comment -- Japan -- The BOJ left its monetary policy
unchanged, as expected. The discount rate has been at an all-time
low of 0.50% since September 1995. Yesterday's decision was not
unanimous, suggesting that some member(s) of the Policy Board
continue to press for an easing.
Former Chief Cabinet Secretary Seiroku Kajiyama reportedly
will announce his intention to run for Prime Minister today. Mr.
Kajiyama is said to be a more aggressive proponent of reform
compared to the current front-runner, Foreign Minister Obuchi. The
LDP postponed its presidential election until July 24th from July
21st in order to give more time for prospective candidates to
campaign within party circles. Because the LDP holds a majority of
the lower house, the winner of the election will become the new
Prime Minister. The party expects to call an extraordinary session
of the Diet on July 30th to elect the new prime minister and name
a new cabinet.
The LDP's tax panel met yesterday and reportedly agreed on the
need for income tax cuts. However, the panel did not make any
determination of about how to implement those cuts. The panel will
reportedly demand additional revisions to the Fiscal Structural
Reform Law if any of the tax cuts are to be permanent. That could
further delay the progress of a much-needed fiscal stimulus
package.
Japan's May current account surplus rose by 62.2% (yr-yr) to
1.409 trillion yen. That marked 14th straight year-on-year
increase and was slightly wider than expectations for a 1.3
trillion yen surplus. While exports are falling due to the
slowdown in neighboring Asian economies, imports are falling faster
with Japan in the grip of a recession.
The Bank of Japan reported that June M2 plus CDs climbed by
+3.5% (yr-yr), exactly in line with expectations. May M2 plus CDs
were revised a bit weaker to +3.6% (yr-yr) from the preliminary
report of +3.8% (yr-yr).
The Nikkei index yesterday closed up 120 points at a 3-1/2
month high settlement of 16,732 (+.71%) as it continued to extend
Monday's rally. Data from the Tokyo Stock Exchange showed that
foreigners were net buyers of Japanese stocks in the second week in
July for the second week in a row after four months as net sellers.
On yesterday's 3-1/2 month high of 16,757, the Nikkei index
recovered sharply by 14.66% (2,142 points) from the recent 6-month
low of 14,615 (6/16/98). Nikkei is up 8.88% for the year-to-date
in yen terms and is up 1.06% in US dollar terms.
Tokyo Sep JGBs yesterday closed down -.27 points at 131.76 as
they consolidated above Tuesday's 9-week low of 131.59. The
Japanese credit market was pressured by some uncertainty on reports
that Seiroku Kajiyama will enter the race for Prime Minister. On
Tuesday's low, the contract extended its 1-1/2 month downmove from
June 5th's contract high to a total of 2.84 points. In London, Sep
JGBs settled at 131.68, down -.08 points from the Tokyo close. The
benchmark No. 182 10-year JGB closed +2.5 bp at 1.430%, well above
the recent all-time record low closing yield of 1.130% (6/2/98).
The Dec Euroyen yesterday settled -3.0 at 99.190 but is holding
above Monday's 2-week low of 99.170.
Asian Stock Market Closes: Hong Kong Hang Seng +1.54%,
Australia All-Ordinaries +1.32%, Singapore Straights Times
Industrials +1.70%, South Korea Composite Index +5.40%, Thailand
Stock Exch +2.19%, Taiwan weighted index +.62%, Philippines
composite index +.16%, Malaysia composite index -.82%, China SE
Shanghai A -.75%, Indonesia Jakarta composite index +1.38%.
OPTIMA FINANCIAL NEWS SCHEDULE^ Friday 7/17/98
A. Today's News (local & GMT release times shown)
Fri US 0830 ET 1230 May goods & services trade deficit expected
-$14.3 bln, April -$14.5 bln.
1000 ET 1400 University of Michigan releases its early July
consumer sentiment index, June -0.9 points to
105.6.
1030 ET 1430 Fed Governor Gramlich testifies before the
Senate Banking Committee regarding
mortgage reform.
N/A Deputy Treasury Secretary Summers &
Japanese MOF official Sakakibara participate
in a symposium on the Asian crisis in
Chatham, MA.
N/A Earnings: Tyco International ($.51), Case
($1.60), DSC Communications (-$.12), &
Healthsouth ($.28).
CAN 0830 ET 1230 May merchandise trade surplus expected
C$900 mln, April C$1.2 bln.
0830 ET 1230 June LEI.
JPN N/A EPA releases its July monthly report.
B. Future News
Tentative:
GER N/A May retail sales, April real sales -2% y/y
(unadjusted) & -4.7% y/y (adjusted).
N/A June M3 money supply, May +4.4%.
N/A June Ifo business climate index, May unch.
N/A May trade balance expected 12.0 bln DM
surplus, April 11.4 bln DM surplus; May
current account balance expected flat, April
2.4 bln DM surplus.
JPN N/A May current account surplus expected 1.3 tln
yen.
Sat US N/A Deputy Treasury Secretary Summers &
Japanese MOF official Sakakibara participate
in a symposium on the Asian crisis in
Chatham, MA.
Week of July 20-24:
Sometime this week:
GER N/A June PPI, May unch m/m & +0.1% y/y.
Mon US 1300 ET 1700 National Association of Home Builders
releases its July single-family home sales
index, June +3 points to 71.
1300 ET 1700 Weekly Treasury auction of 3 & 6-month bills.
N/A IMF Board to vote on approval of $5.6 bln in
assistance to Russia.
CAN 0830 ET 1230 May wholesale trade.
Tue US 0830 ET 1230 June housing starts, May -0.7% to an annual
rate of 1.530 mln units.
June building permits, May +1.7% to 1.543
mln units.
0830 ET 1230 June experimental CPI, May +1.5% y/y; June
core experimental CPI, May +2.0% y/y.
0900 ET 1300 BTM/Schroder weekly retail sales, last -1.0%
w/w.
1000 ET 1400 Fed Chairman Greenspan delivers his semi-
annual Humphrey-Hawkins testimony before
the Senate Banking Committee.
1440 ET 1840 Redbook retailer sales survey for week ended
July 18th, 1st-week +0.8%.
CAN 0830 ET 1230 May retail sales.
JPN 0920 JT 0020 BOJ releases its monthly report.
1500 JT 0600 BOJ Governor Hayami holds press
conference.
Wed US 1000 ET 1400 Fed Chairman Greenspan delivers his semi-
annual Humphrey-Hawkins testimony before
the House Banking subcommittee.
1400 ET 1800 June Treasury statement, June 1997 $54.635
bln surplus.
1430 ET 1830 Treasury announces the details of next
week's 2-year note auction.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
GER 1800 CET 1600 ECB member Issing speaks in Frankfurt.
JPN 1400 JT 0500 BOJ releases minutes from the June 12th
Policy Board meeting.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 18th, last -58,000 to 336,000.
1630 ET 2030 Money supply report for week ended July
13th; 1st-week reserves.
GER N/A Regular bi-weekly BBK Council meeting, last
before summer recess (next mtg Aug 20th).
Fri US N/A No US economic reports scheduled at this
time.
Week of July 27-31:
Mon US 1000 ET 1400 June existing home sales, May +1.0% to an
annual rate of 4.82 mln units.
1300 ET 1700 Weekly Treasury auction of 3 & 6-month bills.
Tue US 0900 ET 1300 BTM/Schroder weekly retail sales.
1000 ET 1400 Conference Board releases its July consumer
confidence index, June +1.4 points to 137.6.
1440 ET 1840 Redbook retailer sales survey for week ended
July 25th.
JPN N/A BOJ Policy Board meeting.
Wed US 0830 ET 1230 Advance June durable goods orders, May
-2.4%.
1300 ET 1700 Treasury auction of 2-year notes.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
CAN 0830 ET 1230 June industrial product price index.
June raw materials product price index.
JPN N/A Preliminary June industrial production, May
-2.0% m/m & -11.2% y/y.
N/A June large retailers sales, May -0.9% y/y.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 25th.
0830 ET 1230 July APICS Business Outlook Index, June
+3.6 points to 51.0.
0830 ET 1230 Q2 Employment Cost Index, Q1 +0.7% q/q &
+3.3% y/y.
1000 ET 1400 June new single-family home sales, May
+0.3% to an annual rate of 890,000 units.
1630 ET 2030 Money supply report for week ended July
20th; 2nd-week reserves.
Fri US 0830 ET 1230 Preliminary Q2 GDP, Q1 +5.4% with chain
price index +1.2%.
1000 ET 1400 July Chicago-area Purchasing Managers
index, June -3.4 points to 52.9%.
CAN 0830 ET 1230 May GDP expected +0.2%, April unch.
JPN N/A July Tokyo CPI, June -0.1% m/m & +0.4%
y/y.
N/A June pan-Japan CPI, May unch m/m & +0.5%
y/y.
N/A June unemployment rate, May +0.01 point to
4.14%.
N/A June labor supply/demand ratio, May -0.02
points to 0.53.
Week of Aug 3-7:
Mon US 0830 ET 1230 June personal income, May +0.5%; June
personal consumption, May +0.6%.
1000 ET 1400 July NAPM index, June -1.8 points to 49.6%.
1000 ET 1400 June construction spending, May -1.5%.
N/A Most US automakers release July sales
reports, June 14.4 mln unit pace.
Tue US 0900 ET 1300 BTM/Schroder weekly retail sales.
1000 ET 1400 June LEI, May unch.
1440 ET 1840 Redbook retailer sales survey for week ended
Aug 1st.
N/A GM expected to release its July vehicle sales
report.
CAN 0830 ET 1230 July building permits.
Wed US 1000 ET 1400 June housing completions, May -3.0% to an
annual rate of 1.455 mln units.
1400 ET 1800 Fed releases Tan Book ahead of Aug 18th
FOMC meeting.
1430 ET 1830 Treasury announces details of Aug refunding
operation (5-year, 10-year, & 30-year
maturities).
N/A Ford releases July vehicle sales.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
CAN N/A 3-day Premiers' conference in Saskatoon
begins.
UK N/A 2-day BOE MPC meeting begins.
Thu US N/A July same-store retail chain sales reports.
0830 ET 1230 Initial unemployment claims for week ended
Aug 1st.
1000 ET 1400 June factory orders, May -1.6%.
1630 ET 2030 Money supply report for week ended July
27th; 1st-week reserves.
CAN N/A 3-day Premiers' conference in Saskatoon
continues.
UK N/A 2-day BOE MPC meeting concludes,
announcement expected at noon UK.
Fri US 0830 ET 1230 July unemployment report: July non-farm
payrolls, June +205,000;
July manufacturing payrolls, June -29,000;
July average workweek, June -0.1 hour to
34.6 hours;
July average hourly earnings, June +0.1%
m/m & +4.1% y/y to $12.74;
July civilian unemployment rate, June +0.2
points to 4.5%.
1000 ET 1400 June wholesale trade: May inventories
+0.6%; May sales -0.3%; May inv-to-sales
ratio +0.01 point to 1.30 mos.
1000 ET 1400 July leading inflation index, June 102.9.
1500 ET 1900 June consumer credit.
CAN N/A 2-day Premiers' conference in Saskatoon
ends.
0700 ET 1100 July unemployment report.
Future News:
Aug 12: BOE releases its Quarterly Inflation Report.
Sep 27: German general election.
Upcoming Central Bank meetings:
FOMC: Aug 18, Sep 29, Nov 17, Dec 22.
Last G7 monetary policy changes:
US Federal funds target raised +25 bp to 5.5% on 3/25/97; discount
rate cut -25 bp to 5.0% on 1/31/96.
CAN Overnight rate target band +50 bp to 4.5-5.0% on 1/30/98.
UK Base rate +25 bp to 7.50% on 6/4/98.
GER Discount rate -50 bp to 2.50% and Lombard rate -50 bp to 4.50%
on 4/18/96 (effective 4/19/96).
2-wk repo rate +30 bp to 3.3% on 10/9/97 for 10/15/97 wkly repo;
after 13-1/2 months at fixed-rate 3.0%.
FRA Intervention rate +20 bp to 3.30% on 10/9/97; 5-10 day repo rate
-15 bp to 4.60% on 12/17/96.
ITA Discount rate -75 bp to 5.50% on 12/23/97; Lombard rate -75 bp
to 7.0% on 12/23/97.
JPN Discount rate -50 bp to .50%, unsecured overnight call loan rate
-40 bp to .45-.50% from .85-.90% on 9/8/95.
Times: US Eastern Time ET=GMT-4; British Time UK=GMT; Continental
European Time CET=GMT+2; Japan Time JT=GMT+9.
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