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OPTIMA RESEARCH INVESTMENT, INC.
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Monday 7/20/98 -- Americas Comment -- The US markets today
will focus on (1) any weekend developments in the Asian and Russian
financial markets, (2) today's release of the US July National
Association of Home Builders home sales index, (3) the US Treasury
market which settled mildly softer last Friday, pressured by the
weakness in the dollar and concerns about capital flight, (4) the
dollar which settled mildly weaker as the greenback awaits today's
decision by the IMF on assistance to Moscow and Friday's LDP vote,
(5) the US stock market which settled little changed as it
consolidated following last week's surge which saw most major
indexes post all-time highs, and (6) the CRB index which closed
sharply higher, led by a surge in grains prices.
This week's US economic calendar is fairly light. The June
housing starts report, June experimental CPI report, and weekly
retailer sales surveys will be released tomorrow. The June
Treasury statement will be released on Wednesday. The weekly
initial claims, money supply, and reserve reports will be released
on Thursday.
Overseas, the Japanese markets will focus on Friday's election
for the LDP presidency and, by extension, the premiership. The
German markets will focus on Thursday's BBK meeting and this week's
June M3 and July inflation data. The British markets will monitor
this week's GDP, retail sales, and trade data for signs of softness
in the economy. The Canadian markets will monitor the latest
meltdown in the Canadian dollar.
US May trade gap widens to another record -- The May goods and
services trade deficit widened to a record -$15.7 billion. That
was moderately wider than expectations for a -$14.3 billion gap.
The April goods and services trade deficit was revised a bit
narrower to -$14.3 billion from the earlier report of -$14.5
billion. Through the first 5 months of the year, the US goods and
services trade deficit widened by +39.5% to -$64.9 billion.
The May trade gap of -$15.7 billion was composed of a record
-$22.8 billion deficit in goods trade (up from April's -$21.3
billion gap). That was partly offset by a $7.1 billion surplus in
services (unchanged from April's $7.1 billion surplus).
May goods and services imports climbed by +0.5% to $92.0
billion. That reversed some of April's -0.9% decline. The small
increase in imports was tied to a +2.9% jump in auto imports, as
well as to gains in shipments of industrial supplies and materials,
and foods, feeds and beverages. Partly offsetting those gains were
declines in imports of non-auto capital goods and consumer goods.
The gain in shipments of industrial supplies was surprising as
adjusted petroleum imports fell by -3.2%.
May goods and services exports fell by -1.3% to $76.2 billion.
That added to April's -2.4% drop. Weakness in exports was broad-
based as auto exports fell by -7.5%, and as shipments of non-auto
capital goods, consumer goods, and foods, feeds, and beverages all
declined in May. Those declines were partly offset by an increase
in exports of industrial supplies and materials. The decline in
non-auto capital goods exports came despite a +27.4% surge in
exports of civilian aircraft. Excluding civilian aircraft, May
exports fell by -2.4%.
The May trade deficit with Japan narrowed to -$5.0 billion
from April's -$5.4 billion gap, but stood far above the year-
earlier deficit of -$3.5 billion. The trade gap with China widened
to a 7-month high of -$4.6 billion from April's -$4.3 billion gap
and the year-earlier deficit of -$3.7 billion. The US trade
deficit with the Asian Newly Industrialized Countries (NICS) of
South Korea, Singapore, Hong Kong & Taiwan narrowed to -$1.61
billion from April's -$1.69 billion, but stood far above the May
1997 deficit of -$140 million. The US trade gap with the entire
Pacific Rim (which includes Japan, China, the NICs and other
nations such as Indonesia) narrowed a bit to -$12.329 billion from
April's -$12.354 billion. Still, through the first 5 months of the
year, the US trade gap with the Pacific Rim widened to -$59.030
billion from the year-earlier gap of -$41.315 billion.
Last Friday's May goods and services trade deficit report was
moderately wider than expectations at a record -$15.7 billion.
However, the content of the report is not very surprising. The
-1.3% drop in exports was generally as expected, reflecting the
impact of the Asian crisis and the strong US dollar. What is
noteworthy is the +0.5% increase in imports which failed to reverse
April's -0.9% decline. The sluggish performance of imports
reflects the effort among US firms to slow inventory growth in
order to prevent the emergence of an inventory overhang as Asian
export markets wilt.
All in all, last Friday's report cemented expectations that
net exports will be a very significant drag on economic growth in
Q2. Unfortunately, the size of that drag is becoming quite clear.
With 2 months of data to work with, and 2 months of record-wide
goods and services trade deficits, forecasts for the advance Q2 GDP
report will need to be revised downward once again. Following the
unexpected decline in May business inventories and the wide April
and May trade deficit reports, forecasts for Q2 GDP will likely
fall to the range of +0.5% to +1.0% from previous forecasts for
about +1.5% to +2.0% growth.
What is important to remember, however, is that the strength
in domestic demand will likely negate the weakness in both net
exports and inventory accumulation. The key question is whether
that strength in the domestic economy dwarfs the impact of the
Asian crisis to an extent that the Fed continues to lean toward
further tightening. That leaning may depend on the extent of the
strength of the final sales to domestic purchasers component of
GDP. In Q1 that component posted an impressive (and, to the Fed a
worrisome) +5.9% increase.
Should this "core" final sales figure remain above +4% in Q2,
the Fed will likely shrug off the headline weakness in the GDP
figure. Instead, the Fed will focus on the strength in the
domestic economy, knowing full well that the impact of the Asian
crisis was expected as was the slowdown in inventory accumulation
following the massive build-up of stocks in Q4 1997 and Q1.
Moreover, the Q2 GDP report will be undercut by the temporary
impact of the GM strike. Last, and not least, the Fed and the
markets realize that the weakness in Q2 GDP will be overstated and
will not persist. Given the tight inventory-to-sales ratios in the
US economy, given the expectations for an eventual resumption of
activity at GM, and given the strength in the US labor market,
housing market, and consumer spending, production and inventory
accumulation will resume in earnest over the near to intermediate-
term. That will propel GDP growth in the coming quarters and
maintain above-trend growth in final sales to domestic purchasers,
thereby keeping the Fed on its toes.
US consumer sentiment weakens in early July -- The University
of Michigan last Friday reported that its early July index of
consumer sentiment fell by -0.8 points to a 7-month low of 104.8.
The index now stands 5.6 points below Feb's all-time high of 110.4.
The early July consumer expectations index was unchanged at 99.3,
while the early July current economic conditions index fell by -2.0
points to 113.4.
The softness in last Friday's consumer sentiment report could
raise some talk of a weakening in consumer spending. However,
consumer sentiment/confidence/comfort are very poor leading
indicators of consumer spending. Therefore, given the tight labor
market and accelerating wage pressures, the strength in housing,
and the high-flying stock market, the outlook for consumer spending
remains quite healthy.
US Interest Rates -- US credit market settles mildly softer as
long liquidations continue ahead of Humphrey-Hawkins testimony --
Sep T-bonds last Friday generally moved sideways in volatile trade
and finally settled mildly softer. Futures closes: USU98 -0-05 at
122-02; TYU98 -0-01 at 113-17; FVU98 unch at 109-195; TUU98 +0-002
at 104-062; TBU98 unch at 94.970; EDZ98 unch at 94.280. Cash
closes (3PM NY): cash 30-yr -0-12 at 105-11; cash 30-yr yield +.026
at 5.746; cash 10-yr -0-03 at 100-28; cash 10-yr yield +.013 at
5.509; cash 5-yr unch at 99-17; cash 5-yr yield unch at 5.485; cash
2-yr -0-005 at 99-275; cash 2-yr yield +.009 at 5.442; 3-mo T-bill
-.022 at 5.009.
Sep T-bonds last Friday slipped to a new 4-1/2 week low of
122-00 as they consolidated below the contract high of 124-14
(6/16/98). The cash 30-year bond yield last Friday climbed to a
new 4-1/2 week high of 5.752% and closed at 5.746% where it moved
farther above the all-time low of 5.570% (7/6/98). 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 last Friday held below the 4-1/2 week
high of 94.335 (7/2/98) where, in turn, they held below the 2-1/2
month high of 94.370 (6/30/98).
Bearish factors included (1) the continued unwinding of
flight-to-quality positions in Treasuries amid optimism surrounding
the situation in Japan (and, by extension in Asia) and in Russia,
(2) the weakness in the dollar, (3) long liquidation pressures with
the new 4-1/2 week low in Sep T-bonds, and (4) last week's upward
push in share prices which may also be drawing capital out of the
Treasury market. Bullish factors last Friday included (1) the
wider than expected May trade deficit which triggered another round
of downward revisions in forecasts for Q2 GDP growth, and (2)
speculation that Fed Chairman Greenspan will be neutral in his
assessment of the economy in this week's Humphrey-Hawkins
testimony.
The focus for the credit market this week will remain on the
events overseas, as well as on Capitol Hill where Fed Chairman
Greenspan will deliver his semi-annual Humphrey-Hawkins testimony
tomorrow and Wednesday.
Overseas, the markets will monitor the run-up to Friday's
election for the presidency of the Japanese LDP. Should the
winning candidate press for aggressive banking reform and tax cuts,
the US credit market may come under additional selling pressure as
hints of stability in Asia trigger the reversal of flight-to-
quality positions in the Treasury market.
At home, Mr. Greenspan's testimony will receive the most
market attention. Expectations call for Mr. Greenspan to repeal
last month's testimony before the Joint Economic Committee where he
suggested that Fed policy will remain on hold until the impact of
the Asian crisis and mild inventory overhang can be gauged. That
impact became clear in Q2 as the trade deficit ballooned and as
inventory growth slowed sharply. The result will be very weak Q2
GDP growth in contrast to the +5.4% pace seen in Q1.
However, Mr. Greenspan, as he did in June, will probably shy
away from any hint about an easing. Instead, he will likely press
home the point that the economy will appear weaker than it actually
is in the Q2 and that strength in domestic demand will force the
Fed to remain vigilant in its ongoing battle to keep price
pressures under wraps. Ironically, that could provide a boost to
the long-end which remains a bit nervous about the tight labor
market and the threat of wage pressures fueling overall price
pressures. At the same time, it will leave the short-end "capped"
near the 5-1/2% funds rate target, barring any suggestion that the
Fed could ease in response to the Asian crisis and sharp slowdown
in Q2 growth.
Fed may conduct a supplemental system repo -- The Fed may
conduct a supplemental system repo operation in order to stay on
top of its day-to-day add need in the new 2-week maintenance period
that began last Thursday. 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. Although the Fed has last
Friday's fixed $2.093 billion 6-day system repo in place, that
operation may fall a bit short of addressing the Fed's entire add
requirement. That fixed 6-day system repo was conducted with the
funds rate trading at 5-7/16%, a bit below the 5-1/2% target.
US Stock Market -- The US stock market last Friday opened
slightly higher and then moved sideways to higher for the rest of
the session to finally settle mostly higher. Settlements were: Dow
Industrials +9.78 at 9337.97, DJU98 unch at 9392, Dow Utilities
-.42 at 291.89, OEX +2.01 at 581.34, S&P 500 +2.70 at 1186.69,
SPU98 +2.60 at 1193.80, NASDAQ Composite +8.20 at 2008.76, and the
Russell 2000 -1.28 at 462.36. The Dow, the OEX, the S&P 500 (cash
and futures) and the NASDAQ all closed at all-time highs last
Friday.
Stock market breadth was mildly bearish last Friday with
declining issues (1,531) leading advancing issues (1,389) by an 11
to 10 margin. Last Friday's volume was average at 614 million
shares while declining volume accounted for 45% of the total. The
percentage of NYSE stocks above their 200-day averages rose
slightly to 51% where it was down a bit from July 10th's 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
(337) exceeded the number posting new 52-week lows (240).
The NASDAQ led last Friday with a .41% gain while the S&P 500
and the Dow rose .23% and .11% respectively. For the week, the
NASDAQ again led with a 3.38% advance which was followed by the Dow
at +2.55%, the S&P 500 at +1.92% and the Russell 2000 at +.86%.
For the year-to-date, the NASDAQ is also in first place with a
27.92% gain followed by the S&P 500 at +22.29% and the Dow at
+18.08%. The Russell 2000 continues to lag with a 5.79% year-to-
date gain.
Bullish factors included (1) a rally in the insurance,
entertainment and healthcare stocks, (2) surging European stock
markets which rose to all-time highs last Friday while the Eurotop
100 rose 3.21% for the week, (3) technical factors as the major
indexes (except for the Russell 2000) posted new all-time highs,
(4) strength in the technology sector as the NASDAQ continued to
surge higher above psychological resistance at 2000, and (5) the
continued flow on money into stock mutual funds which is running
about 20% ahead of last year's levels at a rate of about $1 billion
per day.
Bearish factors for the stock market included (1) the slump in
US company's exports abroad as evidenced by the widening of the May
trade deficit to a 6-year high, (2) the upward drift in long-term
bond yields over the past 2-weeks which is carrying over to the
corporate bond market where the spread between 10-year Treasury
yields and 10-year AAA industrial bond yields has widened by 5 bp
in the past month, (3) valuation concerns with the S&P 500 trading
at a record 28.4 times 12-month trailing earnings and 24.4 times
forecasted earnings, and (4) 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. That was the second highest amount in a 6-month
period after 1997's second half, while Q2 itself set a quarterly
record of $43 billion.
Bullish sentiment is also reaching an extreme level and is
flashing a warning sign. Investment advisor sentiment has been
surging over the past 1-1/2 months and is near a 1-2/3 year high
while the 10-day average of the call/put ratio on the OEX is at an
8-month high. Excessive sentiment is also showing up in investor's
frenzied buying of Internet related stocks. Broadcast.com more
than doubled in its first day of trading last Friday and closed the
day with a market capitalization above $1 billion. The IPO was so
successful that the stock was priced $2 above its expected range
and raised $45 million instead of the $30 million originally
planned. Investors in Broadcast.com must be counting on a good
future since the company lost $6.5 million in 1997 on revenues of
$6.9 million and also lost money in 1996.
Near the top of last Friday's most active list was Microsoft
(+.48%) which changed hands 20.77 million times and posted a new
all-time high of 119-5/8. The company reported after last
Thursday's close that earnings rose 28% (yr-yr), slightly beating
consensus expectations. Microsoft's 40% rally over the past month
has been a big contributor to the gains in the S&P 500 and the
NASDAQ. At last Friday's close, Microsoft was the second most
heavily weighted issue in the S&P 500 (at 3.105%) and the most
heavily weighted company in the NASDAQ (at 12.3%).
Dell (+2.75) traded 19.73 million times and continued its
climb as investors bet that strong sales of Microsoft's Windows 98
will spur PC demand. Dell is up 28.43% in the last 1-1/2 weeks
alone. Incidentally, a dollar invested in Dell at the beginning of
this decade would have risen to $606.51 by Friday's close, a return
of 60,551% on a simple price appreciation basis.
44 of the S&P 500's 89 sub-groups fell last Friday while 41
rose. Market breadth was moderately bearish as 265 of the S&P 500
stocks closed lower while 207 rose. The multi-line insurance sub-
index made a showing last Friday as American International Group
rose 2.71% and posted a new all-time high of 152-5/8. A 1.34%
decline in Intel put the semiconductor sub-index in last place on
a capitalization weighted basis last Friday. Intel for the most
part was able to shrug off weaker than expected Q2 earnings, the
shares rose 4.23% for the week, as investors instead focused on an
expected pick-up later in the year.
Of the 30 Dow stocks, 16 rose last Friday while 13 fell. IBM
added 1-13/16 in anticipation that the company will meet earnings
expectations when it reports Q2 profits today. According to
consensus estimates from First Call, IBM is expected to earn $1.49
per share in Q2 compared to $1.43 in the year ago quarter.
The cash S&P 500 posted an all-time high of 1188.10 last
Friday where the index extended its 1-month rally from 1074.67 (Jun
16) to a total of 113.43 points (+10.55%). The Russell 2000 posted
a new 1-1/2 month high of 464.33 last Friday where it was up 7.07%
from its 5-1/2 month low of 433.66 (June 15). The small-cap index,
however, remains moderately below its all-time high of 492.28 that
was posted on April 22 after retracing 52% of that downmove on last
Friday's high. The Dow Industrials index posted a new all-time
high last Friday of 9354.71 as it held decisively above the 9300
level. The NASDAQ composite index rose to a new all-time high of
2009.64 last Friday where it was up 17.17% from the Jun 15th 4-1/2
month low of 1715.19.
Commodities -- CRB closes sharply higher amid grain surge --
The CRB index last Friday closed up +1.57 points at 211.51 as it
held beneath 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 down -.59% on a month-on-month basis
and down -9.67% on a year-on-year basis.
Closes: Energy: CLQ98 -.50 at 13.98; HUQ98 -.0070 at .4481;
HOQ98 -.0103 at .3748; NGQ98 +.033 at 2.165. Precious Metals:
GCQ98 +1.1 at 295.1; SIU98 +3.3 at 537.3; PLV98 unch at 399.0.
Grains: S X98 +21-6 at 604-0; SMZ98 +7.10 at 163.00; BOZ98 +.40 at
25.11; C Z98 +6-6 at 242-2; W Z98 +3-6 at 288-6. Livestock: LCQ98
+.25 at 63.15; FCQ98 -.10 at 70.57; LHQ98 +.87 at 51.97; PBQ98 +.17
at 53.27. Softs: SBV98 +.24 at 8.95; KCU98 unch at 106.80; CCU98
+17. at 1604.; JOU98 unch at 106.10. Industrials: CTZ98 +1.68 at
74.08; HGU98 +.45 at 77.05; LBU98 +6.80 at 278.40.
Nov soybeans were the CRB's biggest winner last Friday as the
contract rose +21-6 cents to close at 604-0. On last Wednesday's
1-1/4 month low at 571-4, the contract fell 85-4 cents (13.01%)
from the Jun 24th 4-1/2 month high of 657-0. Private weather
forecasters contend that the current weather system which brought
a drought to parts of the South could extend into the Midwest.
However, the latest National Weather Service 6-10 day forecast
called for above average rains. Aside from volatility related to
the weather outlook, the US is expected to harvest a bumper soybean
crop while global demand is weak and supplies are high.
Aug crude oil was the CRB's largest decliner last Friday as
the contract fell -50 cents to close at $13.98. On June 15th,
crude oil futures touched a 12-year low of $11.40 on the
weekly-nearest chart (Jul 98 contract). Venezuelan oil minister
Arrieta said that OPEC agreements on output cuts will not have an
effect on prices until November. Last week's API crude oil report
demonstrated the first effects of recent OPEC production cuts as
refiners depleted stockpiles purchased at lower prices and offered
products at very favorable margins. Seasonal maintenance work on
North Sea oil platforms is reducing British and Norwegian
production.
August gold last Friday closed up +1.1 at $295.1 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 June 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 focus for the Canadian markets this week will
remain on the weak Canadian dollar. The Canadian dollar last
Friday fell to a new all-time low of C$1.4915 where it sold off by
a total of 3.05 cents from the july 2nd 4-1/2 week low of C$1.4610.
The plunge in the Canadian dollar in the last 2-3 weeks has been
fueled by signs that the Canadian economy is beginning to soften.
That exacerbated downward pressures such as the weakness in
commodity prices tied to the Asian crisis.
Evidence of softness in the economy emerged in waves in the
past 2-3 weeks. The June unemployment report showed back to back
declines in payrolls, while the unemployment rate has remained
stuck at 8.4% for 3 straight months. Last week's May manufacturing
activity report showed a sharp -1.0% drop in shipments. Last
Friday's May trade data showed a sharp -1.9% slide in imports,
thereby pointing to softness in domestic demand.
Worse still, last Thursday's June CPI report showed that the
core index slowed to +1.0% (yr-yr), the bottom of the BOC's +1-3%
target range. Given the absence of price pressures and the
slowdown in economic growth, the Bank of Canada may be cornered
into being unable to tighten policy in order to defend the Canadian
dollar. The BOC last tightened on Jan 30th when it hiked its
overnight rate target band by 50 bp to 4.5-5.0%.
The May merchandise trade surplus widened to C$1.67 billion.
That was much wider than expectations for a C$900 million surplus
and up from April's C$1.2 billion surplus. May imports fell by
-1.9% to C$24.465 billion, while exports were unchanged at C$26.139
billion.
The June LEI climbed by +0.5%, matching May's +0.5% increase.
A total of 6 components of the indicator pointed to future growth,
leaving the diffusion index at a fairly strong 60%.
The Canadian dollar last Friday closed .04 cents stronger at
C$1.4886/US$, after it fell to another new all-time low of
C$1.4915.
The Sep Canadian bond last Friday settled +.09 points at
124.71 as it held above last Thursday's 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 last Friday
settled -0.5 bp at 5.398% as it rebounded farther above the 3-month
low of 5.228% (7/15/98). 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 last Friday closed +5 bp at 94.76, as it
held above last Thursday's 2-1/2 month high of 94.93 (7/3/98).
The Toronto-300 stock index last Friday closed +12.50 points
at 7418.30, 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 mildly weaker as wide trade gap and
improved outlook for Russia weighs on the greenback -- The dollar
last Friday edged lower in European trading, rebounded a bit in the
US session, but tailed off through the remainder of the day to
finally settle mildly weaker. Dollar closes (3PM NY): cash dollar
index -.23 at 100.59; dlr/yen -.42 at 139.51; dlr/mark -.0039 at
1.7816; dlr/Swiss +.0002 at 1.5025; stlg/dlr +.0050 at 1.6448;
USD/CAD -.0004 at 1.4886. Mark closes: mark/yen -.07 at 78.29;
stlg/DM +.0025 at 2.9312; mark/FRF -.0025 at 3.3519; mark/lira -.46
at 986.35; mark/Swiss +.0020 at .8432. Futures closes: DXU98 -.22
at 100.36; JYU98 +.0021 at .7223; DMU98 +.0012 at .5633; SFU98
-.0009 at .6689; BPU98 +.0054 at 1.6408; CDU98 +.0002 at .6723;
ADU98 -.0048 at .6283.
The dlr/yen last Friday closed -.42 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 last Friday closed -.39
pfennigs at 1.7816 DM, as it fell to a new 5-1/2 week low of 1.7808
DM. On last Friday's low, the dlr/DM sold off by a total of 5.17
pfennigs from the 3-month high of 1.8325 DM (7/9/98).
Bearish factors for the dollar included (1) expectations that
the IMF today will approve the $5.6 billion tranche of the
assistance package for Russia, thereby helping to stabilize the
situation and underpin the mark, (2) some continued long
liquidation pressures with the 5-1/2 week low in the dlr/mark, and
(3) the wider than expected May US goods and services trade deficit
which fanned 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) technical
buying as the Canadian dollar fell to another new all-time low, and
(3) expectations for only a token BBK tightening ahead of EMU.
European Comment -- The European markets today will focus on
(1) today's release of the UK June money supply report, (2) the
European credit markets which closed mildly higher last Friday, and
(3) the European stock markets which closed moderately higher last
Friday.
Germany -- The German financial markets this week will likely
focus on the expected release of the June M3 money supply report as
well as the possible release of the preliminary July west German
CPI report. Both reports are expected to remain quite favorable
and point to a steady BBK policy stance into Q4.
The June M3 report is expected to show +4.4% growth in the
money supply, unchanged from May and near the center of the BBK's
+3-6% target range. The preliminary July CPI report is expected to
again show that price pressures remain dormant and far below the
BBK's target of under +2%.
The markets will also keep an eye on Thursday's regular bi-
weekly BBK Council meeting. This will be the last meeting before
the summer recess, with the next gathering scheduled for Aug 20th.
No policy changes are expected, but the BBK will likely review its
M3 target for the year. The BBK is not expected to change the
+3-6% target, especially with M3 growth steady near the center of
that band.
Germany's May trade surplus widened to 14.6 billion DM from
11.4 billion DM in April. May's surplus was wider than
expectations for a 12.0 billion DM figure. May exports climbed by
+10.0% (yr-yr)to 77.9 billion DM, while imports edged +1.8% (yr-yr)
higher to 63.3 billion DM. Through the first 5 months of the year,
the German trade surplus widened to 56.7 billion DM from the 39.2
billion DM surplus posted a year-earlier.
The May current account surplus narrowed to 2.2 billion DM
from a revised surplus of 2.3 billion DM in April. Through the
first 5 months of the year, the German current account deficit
totaled -1.9 billion DM, down from the year-earlier gap of -11.2
billion DM. The wider than expected trade balance in Germany
points to continued growth in exports and should ease concern over
the impact of the Asian economic crisis.
The German credit market closed little changed last Friday.
Germany's May trade surplus widened to 14.6 billion DM from 11.4
billion DM in April. 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 last Friday closed +1.0 bp at 4.685%
after posting an all-time low yield of 4.651% on Jul 10th. Liffe
Sep Bunds last Friday closed up +.02 at 108.84 after posting a
contract high of 109.15 last Monday. The Liffe Sep Euromark last
Friday closed unchanged at 96.400 after posting a contract high of
96.410 on Jul 10th.
The Dax index last Friday closed up 54 points at 6148 (+.88%)
after posting a new all-time high of 6168. For the week, the Dax
rose 2.77%. The Dax is up +44.67% for the year to date in mark
terms and +45.85% in US dollar terms. Indications last week that
Europe's economy remains strong and mostly free of inflation should
continue to boost shares this week. In particular, German
investors will be interested in today's Q2 earnings report from
SAP, the world's largest provider of business software. The shares
have already doubled this year on expectations of continued strong
earnings growth.
France -- The Bank of France last Friday reported that its
June industrial survey showed increased activity in all sectors,
except the auto industry. Auto industry production was said to be
stable. Last Friday's survey sets the stage for Wednesday's
expected release of the May industrial production report which is
expected to show a +0.7% (mo-mo) increase.
The French franc last Friday closed .25 centimes stronger at
3.3519 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 little changed last Friday.
Last Thursday, 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 up +0.4 bp at 4.805% after
posting an all-time low yield of 4.758% on Jul 10th. The Sep
Notional bond closed up +.02 at 104.84 after posting a contract
high of 105.21 on Jul 10th. The Sep Pibor closed +.005 at 96.385
after posting a contract high at 96.400 on Jul 10th.
The CAC40 stock index last Friday closed 30 points higher at
an all-time high settlement of 4388 (+.70%) after posting a new
all-time high of 4396. The index rose 3.1 for the week. The CAC40
is up 46.34% for the year-to-date in franc terms and up 46.55% in
US dollar terms. Corporate profits will be the focus this week as
French companies release first half earnings reports. The export
sector will also be under scrutiny after the dollar lost 2.68%
against the French franc last week. Strength in the franc makes
French exports less competitive overseas.
UK -- The British financial markets this week will likely be
presented with some economic data that could dampen speculation
about another tightening at the August MPC meeting. Talk of a
tightening increased last week with the release of the April
average earnings report of +5.4% (yr-yr), mildly stronger than
expectations for a +5.2% (yr-yr) gain. Moreover, March and Feb
earnings data were revised mildly stronger to +5.3% (yr-yr) and
+5.0% (yr-yr) respectively. The minutes from the June MPC meeting
(when the Bank tightened base rates by 25 bp to the current level
of 7.50%) showed that the MPC members were focused on the threat of
accelerated wage growth spilling over to fuel inflationary
pressures.
However, this week's scheduled economic data may throw some
cold water on expectations for a follow-up tightening at the Aug
meeting. Today's release of the June M4 money supply report and
revised June M0 money supply data is expected to point to a further
slowdown in liquidity growth. That should dampen worries that wage
pressures could spill over into general inflationary pressures.
June M4 growth is expected to slow to +9.0% (yr-yr), the top of the
+3-9% target range. June M0 growth was previously reported at
+5.4% (yr-yr).
Wednesday's June retail sales report is expected to show a
sharp reversal down to -0.9% (mo-mo) from May's +1.7% surge. That
should slow year-on-year growth in retail sales volume to +2.9%
from May's +4.6% pace. Year-on-year growth of +2.6% in retail
sales would be the weakest in 2-1/4 years. While sales volume will
likely be held back by factors such as the wet weather and the
World Cup (which kept consumer glued to their TV sets), any
slowdown in sales could calm some nervousness at the MPC that
strong wage pressures will fuel above-trend consumer demand.
Thursday's release of the May global trade data and the June
non-EU trade data should reinforce the fact that the strength in
sterling is eroding the competitiveness of British exports.
Lastly, the markets will keep an eye on Friday's advance Q2
GDP report. Forecasts call for +0.5% (qtr-qtr) growth which would
be unchanged from the growth seen in Q1. However, year-on-year
growth is expected to slow to +2.6% from the +3.0% growth seen in
Q1. That would be the slowest growth in 1-3/4 years and boost
hopes that the Bank will hold off on a follow-up tightening.
Sterling last Friday settled +.25 pfennigs at 2.9312 DM, as it
held 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 mixed last Friday. There were no
domestic economic reports scheduled. The House of Commons Select
Committee asked the government to look into breadth of experience
on the BOE's Monetary Policy Committee when the set external
appointments come up for renewal. The UK credit market is focussed
on today's Jun M4 money supply and Wednesday's Jun retail sales.
The 10-year gilt yield last Friday closed -0.8 bp at 5.845%
and held below the Jun 19th 2-month high yield of 5.931%. Sep
gilts last Friday closed up +.06 points at 108.62 where they
remained within the 3-week trading range. Sep short sterling last
Friday closed up +.020 at 92.190 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. For the week, the
FTSE added 4.12%. The FTSE is up 20.22% for the year-to-date in
sterling terms and up 20.03% in US dollar terms. British banks and
oil companies will begin to report first- half earnings this week
with Northern Rock, British Petroleum and Shell Transport & Trading
scheduled to release.
Asian Comment -- Japan -- As expected the Japanese financial
markets (which are closed today for a national holiday) are focused
solely on Friday's election for the leadership of the ruling
Liberal Democratic Party. As of last Friday, there were 3 declared
candidates for the top job: Foreign Minister Obuchi, former chief
cabinet secretary Kajiyama, and Welfare Minister Koizumi.
Mr. Obuchi is clearly the front-runner since he is the leader
of the largest faction within the party. Mr. Koizumi, a late entry
into the race, is second since he is from the second largest
faction which is the one controlled by former Prime Minister
Miyazawa. However, it is unclear whether Mr. Koizumi has much
support, even within his own faction. The market favorite,
however, seems to be Mr. Kajiyama because of his steady calls for
an aggressive clean-up of the banking system and aggressive tax
cuts. But Mr. Kajiyama's grasp of economic issues remains suspect
as he has also called for higher interest rates and has only
recently shifted to a populist platform after holding on as a
member of the LDP's "old guard" for years.
The Japanese markets this week will also keep an eye on the
BOJ's monthly report as well as the minutes from the BOJ's June
12th Policy Board Meeting. However, barring any surprises, the
markets will look ahead to Friday's LDP vote. Should Mr. Obuchi
win, the markets could react negatively, fearing further months of
policy paralysis as Mr. Obuchi would be expected to carry on the
muddle of policy proposals that marked the term of Mr. Hashimoto.
However, if Mr. Kajiyama pulls off an upset, the markets may be
underpinned by hopes for a "damn the torpedoes" approach to
dragging Japan out of its current recession.
The Economic Planning Agency said in its July report issued
last Friday that the economy is "protracted in its stagnation, and
continues to be in adifficult situation." The EPA said that its
July assessment of the economy was unchanged from the previous
month. Akira Furukawa, an official at the EPA, said that he didn't
think that the economy would worsen much more since household
spending and consumer confidence appear to have bottomed. Consumer
spending accounts for 60% of Japan's economy. Moreover, EPA chief
Obi denied that the Japanese economy is heading for a deflationary
spiral, saying that the 16 trillion yen fiscal stimulus package
should bolster domestic demand.
The Nikkei index last Friday closed down 161 points 16,571
(-.96%) as it fell back from last Thursday's 3-1/2 month high.
Despite last Friday's lower close, the index gained +2.99% for the
week. On last Thursday'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.
Japanese stocks this week may face further profit-taking
pressure following the sharp rally from last Monday's 3-1/2 month
low. Japanese banking stocks may also be under pressure with the
market not convinced that Keizo Obuchi will take the tough steps to
revive Japan's financial sector.
Tokyo Sep JGBs last Friday closed up .13 points at 131.89
after posting a new 2-1/2 month low of 131.50. Confirmation that
Seiroku Kajiyama was also running for Prime Minister dampened
enthusiasm in the Japanese credit market overnight but the
announcement that a third candidate, Welfare Minister Koizumi, had
entered the race sparked a round of short-covering. On last
Friday's low, the contract extended its 1-1/2 month downmove from
June 5th's contract high of 134.43 to a total of 2.93 points. In
London, Sep JGBs settled at 131.81, down -.08 points from the Tokyo
close. The benchmark No. 182 10-year JGB closed -2 bp at 1.415%,
well above the recent all-time record low closing yield of 1.130%
(6/2/98). The Dec Euroyen last Friday settled down 1.5 bp at
99.175 but is holding above last Monday's 2-week low of 99.170.
Asian Stock Market Closes: Hong Kong Hang Seng +.49%,
Australia All-Ordinaries +.15%, Singapore Straights Times
Industrials +1.97%, South Korea Composite Index +5.40% as of 7/16,
Thailand Stock Exch +4.71%, Taiwan weighted index +1.36%,
Philippines composite index -.54%, Malaysia composite index +3.56%,
China SE Shanghai A -.87%, Indonesia Jakarta composite index
+2.63%.
OPTIMA FINANCIAL NEWS SCHEDULE^ Monday 7/20/98
A. Today's News (local & GMT release times shown)
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.
1300 ET 1700 Chicago Fed President Moskow speaks on
the Year 2000 problem.
N/A IMF Board to vote on approval of $5.6 bln in
assistance to Russia.
CAN 0830 ET 1230 May wholesale trade.
UK 0930 UK 0830 June M4 money supply expected +0.7% m/m
& +9.0% y/y, May +0.5% m/m & +9.2% y/y.
Revised June M0 money supply, preliminary
report was +0.2% m/m & +5.4% y/y.
JPN N/A Holiday, financial markets are closed.
B. Future News
Sometime this week:
GER N/A June PPI expected unch m/m & unch y/y,
May unch m/m & +0.1% y/y.
N/A May retail sales, April real sales -2% y/y
(unadjusted) & -4.7% y/y (adjusted).
N/A June M3 money supply expected +4.4%, May
+4.4%.
N/A June Ifo business climate index, May unch.
N/A June import prices expected -0.5% m/m & -
1.8% y/y, May -0.6% m/m & -1.6% y/y.
N/A Individual west German states release July
CPI reports.
N/A Preliminary July west German CPI, June
+0.1% m/m & +1.1% y/y.
Tue US 0830 ET 1230 June housing starts expected +1.3% to 1.55
mln units, 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.
1300 ET 1700 NY Fed President McDonough speaks in
Mexico.
1440 ET 1840 Redbook retailer sales survey for week ended
July 18th, 1st-week +0.8%.
CAN 0830 ET 1230 May retail sales expected +0.5% m/m, April
+1.0% m/m.
JPN 0920 JT 0020 BOJ releases its monthly report.
1500 JT 0600 BOJ Governor Hayami holds press
conference.
Wed US 0930 ET 1330 Treasury Secretary Rubin & Deputy Treasury
Secretary Summer testify before the Senate
Finance Committee regarding retirement
issues.
0930 ET 1400 Fed Chairman Greenspan delivers his semi-
annual Humphrey-Hawkins testimony before
the House Banking subcommittee.
1400 ET 1800 June Treasury statement expected $59.0 bln
surplus, 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.
UK 0930 UK 0830 June retail sales expected -0.9% m/m &
+2.9% y/y, May +1.7% m/m & +4.6% y/y.
GER 1800 CET 1600 ECB member Issing speaks in Frankfurt.
FRA 0845 CET 0645 May industrial production expected +0.4%
m/m & +7.1% y/y, April -0.7% m/m & +7.5%
y/y.
N/A Prime Minister Jospin announces budget
framework to the Cabinet.
JPN 0850 JT June trade surplus expected 1.4 tln yen, May
1.2 tln yen surplus.
1400 JT 0500 BOJ releases minutes from the June 12th
Policy Board meeting.
N/A Finance Minister Matsunaga holds press
conference.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 18th expected -20,000 to 316,000, last
-58,000 to 336,000.
1630 ET 2030 Money supply report for week ended July
13th; 1st-week reserves.
UK 0930 UK 0830 May global visible trade deficit expected -2.2
bln sterling, April -1.390 bln sterling.
June non-EU visible trade deficit expected -
1.2 bln sterling, May -1.603 bln sterling.
GER N/A Regular bi-weekly BBK Council meeting, last
before summer recess (next mtg Aug 20th).
2000 CET 1800 BBK member Schmidhuber speaks to CDU
group.
FRA 0845 CET 0645 June household consumption, May +0.4%
m/m & +6.3% y/y.
N/A BOF MPC meeting.
JPN 1400 JT 0500 May LEI expected 33.3, April 11.1; May
coincident indicator expected 20.0, April 10.0.
Fri US 1000 ET 1400 Fed Chairman Greenspan & CFTC
Chairwoman Born testify before the House
Banking Committee regarding derivatives
regulation.
UK 0930 UK 0830 Advance Q2 GDP expected +0.5% q/q &
+2.6% y/y, Q1 +0.5% q/q & +3.0% y/y.
FRA 0845 CET 0645 May merchandise trade balance, April 15.4
bln franc surplus.
0850 CET 0650 Final June CPI, preliminary report was unch
to +0.1% m/m & +1.0% y/y.
JPN N/A LDP elects new leader.
1400 JT 0500 EPA releases its June consumer confidence
index, March 38.2.
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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