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OPTIMA RESEARCH INVESTMENT, INC.
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Wednesday 7/22/98 -- 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 June
Treasury statement, (3) the US Treasury market which settled mixed
as the long-end was boosted by Mr. Greenspan's vigilance against
inflation, (4) the dollar which settled a moderately stronger,
lifted by Mr. Greenspan's testimony and speculation about an Obuchi
victory in Friday's LDP vote, (5) the US stock market which settled
sharply weaker as Mr. Greenspan sounded another warning about
inflated equity values, and (6) the CRB index which closed sharply
lower.
The financial markets today will again key on Mr. Greenspan's
testimony on Capitol Hill. Mr. Greenspan today will appear before
the a House Banking subcommittee where he will largely repeat
yesterday's testimony before the Senate Banking Committee. While
today's testimony will be largely overlooked by investors, the
markets will watch for any clarifications to yesterday's comments.
Greenspan confirms that policy remains on hold and that the
Fed's bias toward tightening remains intact -- Fed Chairman
Greenspan yesterday delivered his semi-annual Humphrey-Hawkins
testimony before the Senate Banking Committee. Mr. Greenspan
implied that the Fed is not contemplating any imminent change in
policy due to the uncertainty surrounding Asia or the slowdown in
US economic activity seen in Q2. However, just as he did before
the Joint Economic Committee in June, Mr. Greenspan gave no hint of
a future easing, but openly cautioned that the Fed may need to
tighten down the road.
Mr. Greenspan told the Committee that "with labor markets very
tight and domestic final demand retaining considerable momentum,
the risks of a pickup in inflation remain significant." However,
the Fed Chairman admitted that US economic activity slowed sharply
in recent months. He cited the slowdown in inventory accumulation
and the "financial troubles in Asian economies [which! are now
demonstrably restraining demands for US goods and services."
Moreover, he warned that those troubles could spread further.
Therefore, the Fed kept monetary policy unchanged through the first
half of the year.
Concerning the recent performance of the economy, Mr.
Greenspan summed up by saying that the "growth of US output appears
to have slowed sharply." He cited the GM strike (which he said
could subtract about 0.5 points from Q2 GDP), the sharp slowdown in
inventory building, and the impact of the Asian crisis on the
export sector of the economy as factors behind slower US growth.
However, Mr. Greenspan made it clear that he does not anticipate a
negative reading for Q2 GDP, saying the such forecasts "would have
to be regarded as conjectural." That is because "other indicators
of output... show a somewhat steadier, though slowing path over the
first half of the year." He added that underlying demand trends
show a "impetus to the continuing economic expansion."
Mr. Greenspan then turned his attention to inflation where he
admitted that price pressures have remained low. However, he was
quick to caution that some factors holding down inflation are only
transitory. Among these are low oil prices and the favorable trend
in medical care costs. In fact, he said that the favorable trend
in medical care costs "may have run its course." That, he said
could drive up compensation costs, adding that "given that
compensation costs are likely to accelerate at least a little
further, productivity trends and profit margins will be key in
determining price performance in the period ahead."
Narrower corporate profit margins have now appeared on the
Fed's radar screen as a threat to price pressures as well.
Productivity growth and profit margins peaked in Q3 1997 and both
have fallen off in the subsequent two quarters. Clearly, Mr.
Greenspan is concerned about the consequences for inflation should
that trend continue.
Although Mr. Greenspan said that "a strong signal of inflation
pressures building because of compensation increases markedly in
excess of productivity gains has not yet clearly emerged in this
expansion, he was quick to add that "it would not be prudent to
assume that even strongly rising productivity, by itself, can
ensure a non-inflationary future.
Mr. Greenspan closed his testimony by returning to the tight
labor market, saying that the Fed feels that "modestly higher
inflation" over the next 18 months is the "most likely outcome."
That outlook is tied to the ebbing of the transitory factors that
held prices in check (see above) as well as the tight labor market.
He summed up by saying that the FOMC "believes that given the
tightness in the labor markets, the potential for accelerating
inflation is probably greater than the risk of protracted,
excessive weakness in the economy." Therefore, the FOMC "will need
to remain particularly alert to the possibility that more
fundamental imbalances are increasing inflationary pressures....The
committee would need to resist vigorously any tendency for an
upward trend, that could become embedded in the inflationary
process."
Mr. Greenspan could not have made it any clearer for the
markets. Anticipation of a Fed easing anytime soon is certainly
misplaced, absent any new disaster in Asia or the emerging markets.
As long as the tightness in the labor market and the above-trend
growth seen in the domestic sector of the economy expand at an
above-trend pace, the Fed will continue to lean toward tightening.
In fact, during the question-and-answer session of yesterday's
testimony, Mr. Greenspan never back-tracked from that position.
Just as in June, the Fed Chairman never outlined the string of
economic events that would be needed for the Fed to contemplate an
easing of monetary policy. This suggests the FOMC's bias toward
tightening remains intact.
FOMC releases its revised economic forecasts -- The FOMC
yesterday released its revised economic forecasts. The Committee
pegged 1998 GDP growth at +3.00-3.25%, up sharply from Feb's
projection of +2.00-2.75% growth. The CPI was pegged at
+1.75-2.00%, down from Feb's +1.75-2.25% forecast. Unemployment
this year is expected to average 4.25-4.5% versus Feb's forecast of
4.75%. Looking ahead to 1999, the FOMC expects GDP growth to slow
to +2.0-2.5%, inflation to accelerate to +2.0-2.25%, and
unemployment to climb to 4.5-4.75%.
As expected, the FOMC left its monetary targets unchanged.
The M2 target remains at 1-5% and its M3 target remains at 2-6%.
Both targets were extended through 1999. The FOMC, however, noted
that both M2 and M3 have moved back into sync with their historical
growth patterns. Therefore, the Committee members are giving M2
and M3 growth greater weight in their deliberations. However, the
Committee reported that velocity still remains "somewhat
unpredictable."
US June housing starts surge to near cycle high -- June
housing starts climbed by +5.6% to an annual rate of 1.615 million
units. That was moderately stronger than expectations for a +1.3%
increase to an annual rate of 1.55 million units. May housing
starts were revised to -1.0% from -0.7% although the absolute level
was left unrevised at 1.530 million units. On a year-on-year
basis, June housing starts climbed by +13.5%. Through the first 6
months of the year, housing starts climbed by +7.8% from a year-
earlier.
The strength in June housing starts was broad-based. Starts
climbed by +9.4% in the West, by +8.4% in South, and by +1.6% in
the South. That was partly offset by a -9.3% slide in the
Northeast. Key single-family starts edged +2.5% higher to an
annual rate of 1.250 million units. That more than reversed May's
-1.5% decline to 1.219 million units. Multi-family starts climbed
by +17.4% to an annual rate of 365,000 units. That added to May's
+0.6% increase to 311,000 units.
June building permits fell by -1.7% to 1.517 million units.
That reversed May's +1.7% increase to 1.543 million units. On a
year-on-year basis, June building permits climbed by +13.6%.
Through the first 6 months of the year, building permits climbed by
+9.9% from a year-earlier.
Yesterday's June housing starts report was clearly on the
strong side as the annual rate of 1.615 million units fell just
100,000 units below Feb's 9-1/3 year and cycle high of 1.616
million units. Moreover, yesterday's report may have been a bit of
the soft side to the extent that wet weather slowed starts activity
in the Northeast where starts fell by -9.3%.
Looking ahead, housing activity should remain strong.
Evidence of future strength was seen in Monday's July National
Association of Home Builders housing market index which climbed to
a new cycle high of 72. Most important of all, however, is the
fact that the economic fundamentals that underpin the housing
market remain firmly intact. Those fundamentals include the tight
labor market, strong personal income, strong consumer confidence,
the historically low level of interest rates which make housing
more affordable, and the wealth effect from the strong stock
market. In addition, the inventory-to-sales ratio for new single-
family homes held at 3.9 months in May where it stood just 0.1
point above Feb's all-time low of 3.8 months. That tight supply
should encourage builders to begin new projects.
The focus for the financial markets as far as housing is
concerned will now turn to next Monday's June existing home sales
report and especially to next Thursday's June new single-family
home sales report. Strength in new home sales feeds through the
strength in consumer spending and strength in starts activity,
thereby boosting domestic demand in the US economy. This is
critical at a time when the gaping US trade deficit is sapping
strength from headline GDP activity.
Retailer sales are mixed in the latest week -- The Redbook
yesterday reported that through the second week of July, retailer
sales climbed by +0.7% from June. That was little changed from the
+0.8% increase posted through the first week of the month. On a
year-on-year basis, sales climbed by +7.8%, down a bit from the
+8.0% increase posted a week earlier. The Redbook reported that
while most retailers were on-plan through the second week of the
month, sales were mixed in the latest week. The Redbook said that
sales in the South were underpinned by strength in some seasonal
goods as consumers tried to keep cool in the searing heat wave.
BTM/Schroders yesterday reported that through the week ended
last Saturday, its index of same-store retail chain sales fell by
-0.9% from the previous week. That added to the previous week's
-1.0% decline. On a year-on-year basis, sales slowed a bit to
+7.2% from the previous week's +7.3% gain. Despite the decline in
sales in the week, Schroders reported that sales were generally on-
plan.
July is a difficult month for retailers, especially in apparel
and department store circles as autumn lines have yet to appear on
the shelves and back-to-school demand remains several weeks away.
At the same time, summer seasonal merchandise is typically
discounted as demand for such items dries up fast.
US Interest Rates -- US credit market settles mixed as long-
end gets some support from Mr. Greenspan's vigilance against
inflation -- Sep T-bonds yesterday chopped around during Fed
Chairman Greenspan's testimony, but pushed higher through the
remainder of the day to finally settle moderately stronger.
Futures closes: USU98 +0-18 at 123-04; TYU98 +0-04 at 113-27; FVU98
unch at 109-225; TUU98 -0-005 at 104-075; TBZ98 +.010 at 95.040;
EDH99 -.005 at 94.350. Cash closes (3PM NY): cash 30-yr +0-20 at
106-14; cash 30-yr yield -.042 at 5.672; cash 10-yr +0-07 at
101-11; cash 10-yr yield -.029 at 5.447; cash 5-yr +0-01 at 99-21;
cash 5-yr yield -.007 at 5.456; cash 2-yr -0-010 at 99-275; cash
2-yr yield +.018 at 5.442; 3-mo T-bill -.050 at 4.934.
Sep T-bonds yesterday held above Monday's and the June 17th
6-week low of 121-30 as they consolidated below the contract high
of 124-14 (6/16/98). The cash 30-year bond yield yesterday
continued to hold below last Friday's 4-1/2 week high of 5.752% and
closed at 5.714% as it consolidated 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
yesterday held below the 4-1/2 week high of 94.335 (7/2/98) which
was just 3.5 bp below the 2-1/2 month high of 94.370 (6/30/98).
Bullish factors yesterday included (1) Fed Chairman
Greenspan's hawkish Humphrey-Hawkins testimony which lifted the
long-end as investors were heartened by his reassurance of the
Fed's vigilance against inflationary pressures, (2) short-covering,
(3) the plunge in the CRB index to new 5-year lows, (4) the
strength in the dollar, and (5) underlying support from the recent
flurry of downward revisions in forecasts for Q2 GDP growth.
Bearish factors included (1) disappointment on the short-end that
Mr. Greenspan did not soften his outlook due to the current dip in
the economy, and (2) the stronger than expected June housing starts
report of +5.6% which nearly posted a new cyclical high and which
indicated unabated strength in domestic demand.
Fed may conduct another supplemental system repo -- The Fed
today may conduct another supplemental system repo operation in
order to stay on top of its $2-4 bln add need in the new 2-week
maintenance period that began last Thursday. That add need is
fueled largely by high levels of currency in circulation as the
summer vacation season remains in high gear. The may need to roll-
over Monday's expiring $1.618 billion 2-day system repo although
last Friday's fixed $2.093 billion 6-day system repo will remain in
place until tomorrow. The Fed yesterday remained out of the open
market with the funds rate trading at the 5-1/2% target.
US Stock Market -- The US stock market yesterday opened on its
session high and then trended steadily lower for the entire session
to finally settle with fairly steep losses. Settlements were: Dow
Industrials -105.56 at 9190.19, DJU98 -132 at 9233, Dow Utilities
-1.71 at 288.24, OEX -9.59 at 568.86, S&P 500 -19.03 at 1165.07,
SPU98 -20.80 at 1172.80, NASDAQ Composite -35.11 at 1979.14, and
the Russell 2000 -5.78 at 456.14.
Stock market breadth was solidly bearish yesterday with
declining issues (2,094) leading advancing issues (878) by a 12 to
5 margin. Yesterday's volume was slightly above average at 659
million shares while declining volume accounted for the majority,
69%, of the total. The percentage of NYSE stocks above their
200-day averages fell to 49% where it was down from its 2-month
high of 52% (July 10) but above its 3-1/2 year low of 42% (June
22). The number of shares posting new 52-week low (330) exceeded
the number posting new 52-week highs (285).
The NASDAQ, the leader over the past several weeks, was
yesterday's biggest decliner as it fell 1.74%. The S&P 500
followed with a 1.61% drop while the Russell 2000 and the Dow lost
1.25% and 1.14%, respectively. For the year-to-date, the NASDAQ is
in first place with a 26.03% gain followed by the S&P 500 at
+20.06% and the Dow at +16.21%. The Russell 2000 continues to lag
with a 4.38% year-to-date gain.
Bearish factors for the stock market included (1) a warning
from Merck, the US's biggest drugmaker, that earnings for all of
1998 would be on the low side of expectations, (2) profit taking
with the S&P 500 up 10.79% in the last month through Monday's all-
time high, (3) a reversal in the tech-stocks as the NASDAQ plunged
1.74% after nine consecutive record high closes, (4) valuation
concerns with the S&P 500 trading at a record 6.31 times book
value, more than twice its level seen at the start of 1995, and (5)
indications that bullish sentiment is reaching an extreme level
with investment advisor sentiment surging over the past 1-1/2
months to near a 1-2/3 year high, the 10-day average of the
call/put ratio on the OEX near an 8-month high and with excessive
speculation driving money losing Internet stocks to absurd levels.
Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins
testimony before the Senate Banking Committee also had a negative
effect on the stock market. First, the Fed chief made it clear
that there would not be an easing in monetary policy and that the
FOMC would continue to lean towards a tightening. That will limit
any further decline in interest rates.
Secondly, there was a change in Mr. Greenspan's tone towards
the stock market. In April, Mr. Greenspan said in a Washington
speech that US stock market prices were not out of line given (1)
low interest rates, (2) the rate of earnings growth, and (3)
expectations for a pick-up in productivity. Yesterday, the Fed
chief acknowledged the slowdown in corporate earnings growth that
is already occurring and said that current long-term earnings
expectations were "unrealistic." Mr. Greenspan dismissed the new
era thinking that is being used by some to justify high valuations
and said that "history tells us that (profit growth) is going to
run into some difficulty sooner rather than later."
Among the companies expected to report earnings today and
their consensus estimates according to First Call are: Allstate
($.73), Amgen ($.74), Anheuser-Busch ($.77), Disney ($.21), Duke
Energy ($.68), DuPont ($.87), Lilly ($.43), Lucent Technologies
($.27), Mobil ($.81), and US Airways ($1.86). Tomorrow, 3M ($.92),
Boeing ($.33), Chevron ($.75), Dow Chemical ($1.84), Southwest
Airlines ($.54) and Union Pacific (-$.17) are expected to report.
At the top of yesterday's most active list was Dell (-4.42%)
which traded 21.9 million shares. Dell's CFO told analysts in a
conference call what most people already know, i.e., that PC prices
are falling. Any bad news out of Dell will cause investors to
question the sanity of owning shares in a company that is trading
68 times 12-month trailing earnings, especially when its business
model is beginning to attract imitators. Microsoft (-3.58%) traded
heavily yesterday (18.65 million times) and fell back on profit
taking pressures after the shares rose 44% in the 1-1/2 months
through last Friday.
Yesterday's sell-off was broad-based as 77 of the S&P 500's 89
sub-groups fell while only 12 rose. Market breadth was also
bearish as 385 of the S&P 500 stocks closed lower while 100 rose.
Yesterday's decline touched nearly every category but the drug
sector was the worst performer on capitalization weighted basis.
The decline was led by Merck (-7.09%) but Pfizer (-3.23%) and
Schering Plough (-3.10%) also fell. Merck traded 9.24 million
times (3-1/2 times its average daily volume) after reporting a 14%
(yr-yr) increase in Q2 earnings but warning that profits for all of
1998 would be at the bottom of consensus expectations. Factors
leading to lower profit expectations included increasing
competition for its more profitable drugs, the expiration of
patents over the next several years and expectations that
advertising and marketing costs will rise. Investors won't be shy
to take profits with the drug sector already enjoying a strong run
this year and trading with a 12-month trailing P/E ratio of 52.5,
well above the overall S&P 500's P/E of 28.2. Incidentally, at
28.2, the S&P 500's P/E ratio is just below its record of 28.5 set
last week.
Of the 30 Dow stocks, 22 fell yesterday while 6 rose. Ten of
the Dow stocks suffered a loss of a $1 or more. Merck (-9-13/16)
was the Dow's biggest loser followed by Travelers Group (-3-5/8),
JP Morgan (-3-1/2), General Electric (-2-9/16) and American Express
(-2-1/8). IBM (+6-1/8) bucked the sell-off among the Dow stocks
and posted a new 52-week high of 131. IBM reported after Monday's
close that it beat earnings expectations by a penny but investors
were pleased with the company's announcement that it expected
profits from its corporate services unit to rise in the second
half.
The cash S&P 500 posted an all-time high of 1190.58 on Monday
where the index extended its 1-month rally from 1074.67 (Jun 16) to
a total of 115.91 points (+10.79%). 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) and where it retraced 52%
of its 3-month downmove from the all-time high of 492.28 (April
22). The Dow Industrials index posted a new all-time high of
9367.84 yesterday where it extended its 1-month upmove to a total
of 9.31%. The NASDAQ composite index rose to a new all-time high
of 2028.06 yesterday where it was up 18.24% from the Jun 15th 4-1/2
month low of 1715.19.
Commodities -- CRB closes at 5-year low with sharply lower
natural gas prices -- The CRB index yesterday closed down -1.74
points at a 5-year low settlement of 207.71 as it continued to
retreat from the Jun 30th 5-week high of 216.75. The major lows on
the downside are yesterday's 5-year low of 207.49, 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 -1.97% on a month-on-month basis and
down -10.85% on a year-on-year basis.
Closes: Energy: CLQ98 +.49 at 13.79; HUQ98 +.0047 at .4340;
HOQ98 +.0054 at .3684; NGQ98 -.155 at 1.940. Precious Metals:
GCQ98 -1.2 at 295.5; SIU98 +7.0 at 554.0; PLV98 -6.6 at 387.0.
Grains: S X98 -6-4 at 575-6; SMZ98 -1.90 at 155.00; BOZ98 -.06 at
24.62; C Z98 -2-2 at 234-0; W Z98 -3-6 at 286-6. Livestock: LCQ98
+.27 at 61.92; FCQ98 +.25 at 69.47; LHQ98 -.20 at 49.77; PBQ98
+3.00 at 55.60. Softs: SBV98 -.49 at 8.51; KCU98 unch at 108.25;
CCU98 -23. at 1588.; JOU98 -.25 at 105.10. Industrials: CTZ98 -.80
at 72.61; HGU98 -1.80 at 77.25; LBU98 +9.70 at 287.20.
Aug natural gas was the CRB's biggest loser yesterday as the
contract fell -.155 to close at 1.940. On yesterday's contract low
at 1.940, natural gas fell -.580 (23.0%) from the July 1st 3-month
high at 2.520. Last Wednesday, the American Gas Association said
that weekly storage of natural gas rose +93 billion cubic feet.
The storage level is 25% higher than one year ago and represents
68% of capacity with three months remaining to build stockpiles
before the winter heating season.
Oct sugar was the CRB's second biggest decliner yesterday as
the contract fell -.49 cents to close at 8.51. On Monday's 1-month
high at 9.12, the contract rose 1.62 cents (21.6%) from the Jun
15th 10-1/2 year low of 7.50. The Russia government essentially
banned further sugar imports this year when it imposed an import
tax of 75% on raw sugar and raised the tax on refined sugar to 45%
from 25%. Russia is usually the world's biggest importer of sugar.
A slump in demand due to the Asian crisis culminated in last
month's 10-1/2 year low.
Aug crude oil yesterday rose +49 cents to close at $13.79. On
June 15th, crude oil futures touched a 12-year low of $11.40 on the
weekly-nearest chart (July 98 contract). Participants expected
another bullish report from American Petroleum Institute after the
close. Last week, the API said that crude oil stocks fell a much
larger than expected -6.3 mln barrels. The Centre for Global
Energy studies said recently that the daily increase in global
stockpiles grew to 2.4 mln barrels per day in the second quarter.
August gold yesterday closed down -1.2 at $295.5 and remained
below the psychologically important $300 level. The Japanese yen
traded lower against the dollar yesterday. 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 -- Canadian May retail sales climbed by +0.5% (mo-mo)
and +6.3% (yr-yr) which was in line with market expectations.
April retail sales were revised moderately stronger to +1.4%
(mo-mo) from the earlier report of +1.0% (mo-mo). The strength in
May sales was broad-based as auto sales climbed by +0.4% (mo-mo)
and as non-auto sales posted a +0.3% (mo-mo) and +6.6% (yr-yr)
gain. Statistics Canada yesterday cautioned that while April and
May sales were on the strong side, June sales may be soft due to
the impact of the GM strike which could deplete auto sales.
The Canadian dollar yesterday closed .33 cents weaker at
C$1.4916/US$, as it fell to another new all-time low of C$1.4929.
The Sep Canadian bond yesterday settled +.10 points at 125.15
as it rebounded farther 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 yesterday
settled -2.9 bp at 5.334% 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 Dec
3-month bankers acceptance yesterday closed -3 bp at 94.62, as it
held above last Thursday's 4-week low of 94.53.
The Toronto-300 stock index yesterday closed -23.30 points at
7409.40, 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 moderately stronger, lifted by
Greenspan testimony -- The dollar yesterday pushed higher through
most of the US session and finally settled moderately stronger.
Dollar closes (3PM NY): cash dollar index +.46 at 100.94; dlr/yen
+1.51 at 140.36; dlr/mark +.0060 at 1.7878; dlr/Swiss +.0051 at
1.5104; stlg/dlr -.0041 at 1.6430; USD/CAD +.0033 at 1.4916. Mark
closes: mark/yen +.59 at 78.50; stlg/DM +.0025 at 2.9381; mark/FRF
+.0006 at 3.3510; mark/lira +1.31 at 986.30; mark/Swiss unch at
.8447. Futures closes: DXU98 +.47 at 100.78; JYU98 -.0076 at
.7182; DMU98 -.0017 at .5614; SFU98 -.0024 at .6654; BPU98 -.0042
at 1.6384; CDU98 -.0014 at .6710; ADU98 -.0046 at .6272.
The dlr/yen yesterday closed +1.51 yen but still basically
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
+.60 pfennigs at 1.7878 DM, as it rebounded above Monday's 6-week
low of 1.7763 DM. On Monday's low, the dlr/DM sold off by a total
of 5.62 pfennigs from the 3-month high of 1.8325 DM (7/9/98).
Bullish factors for the dollar included (1) Fed Chairman
Greenspan's Humphrey-Hawkins testimony which was more hawkish than
expected, (2) short-covering and technical buying, (3) talk that
Foreign Minister Obuchi will be victorious in the LDP leadership
race, thereby feeding underlying concerns about the glacial pace of
economic and banking reform in Japan, and (4) the IMF's decision to
release less aid than expected to the Russian government which
weighed a bit on the mark. Bearish factors for the dollar centered
on (1) the stronger than expected German June M3 report of +5.3%
(vs May's +4.4%) although it was largely due to special one-time
factors, and (2) persistent worries about a sharp slowdown in US
economic activity in the second half of the year.
European Comment -- The European markets today will focus on
(1) today's release of the UK June retail sales report, the French
May industrial production report, and the possible release of the
individual west German July CPI state reports, (2) the European
credit markets which closed mixed yesterday, and (3) the European
stock markets which closed moderately weaker yesterday.
IMF reduces Russian immediate loan by $800 mln to $4.8 bln --
The IMF's Executive Board on Monday evening approved a $11.2 bln
loan package for Russian but reduced the immediate disbursement to
$4.8 bln from the original request of $5.6 bln because Russia has
failed to implement all of the IMF's preconditions. However, IMF
Deputy Managing Director Stanley Fischer said that the shortfall
could be made up in September if Russia implements the necessary
reform measures.
The IMF's action meant with general market approval. The
smaller package had been hinted at by Yeltsin aide Anatoly Chubais
earlier on Monday so the market was not taken by surprise. The IMF
had to save some face by withholding some of the massive loan to
keep the pressure on the Duma to go along with critical reform
measures. In addition, the IMF had to look a bit tougher to US
Republicans who are reluctant to provide additional bailout money
to the IMF.
Germany -- German June M3 strengthened to +5.3% from May's
+4.4% and was stronger than market expectations of about +4.4%
(seasonally adjusted and annualized from the Q4-1997 base).
However, the increase was due to the special factors of (1) the
Bundesbank's large profit payout to the government in May which
reduced public sector borrowing during that month, but led to a
sharp rebound in borrowing in June (thereby driving M3 growth
higher), and (2) a net inflow of funds to banks from abroad at the
end of the first half.
The move in the series toward the upper end of the
Bundesbank's 3-6% target range was a bit disconcerting, although
from the old Q4-1996 base, M3 was up an annualized +5.0% which was
right on the Bundesbank's target for 1997-98. Moreover, there was
some good news in the report that private-sector credit lending in
the 6-months through June eased to +8.7% (annualized, seasonally
adjusted) from May's +9.3%.
All in all, yesterday's M3 report will have little impact on
the BBK policy deliberations. The Bundesbank is well aware that M3
growth was driven by one-time factors last month. Furthermore, the
BBK is limited to some extent from any tightening move by the Asian
crisis continues and by the upcoming Sep 27th general election.
Thus, expectations for any tightening move aimed at promoting
short-term rate EMU convergence remain firmly planted at late in
the year.
The west German Ifo June business climate index fell by -0.4
points to 98.3 from May's 98.7 and was a bit weaker than market
expectations of 98.5. The east German June index fell by 2.0
points to 107.1 from May's record high of 109.1 (revised down 0.2
from 109.3).
The German credit market closed slightly higher yesterday with
support from the weaker than expected German June Ifo June business
climate report. The market shook off the German June M3 report due
to the special factors. The German credit market is focussed on
the possible release today of the Jun PPI report (expected unch
m/m, unch y/y), tomorrow's Bundesbank Council meeting, and the July
west German CPI (expected +0.2% m/m, +0.9% y/y).
The 10-year Bund yield yesterday closed -1.5 bp at 4.661%
after posting an all-time low yield of 4.651% on July 10th. Liffe
Sep Bunds yesterday closed up +.21 at 109.15 and posted a contract
high of 109.21. The Liffe Dec Euromark yesterday closed down -.010
at 96.165 after posting a contract high of 96.185 on Monday.
The Dax index yesterday closed -6 points at 6165 (-.10%) after
posting a new all-time high of 6218. The Dax is up +45.08% for the
year to date in mark terms and +45.88% in US dollar terms. A rise
in German banking shares ahead of earnings reports next week and a
rally in SAP (+4.17%) were offset by a decline in BMW which was
dropped from Lehman Brother's recommended list.
France -- The French franc yesterday closed .06 centimes
weaker at 3.3510 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. Bullish
factors included the higher US credit market. The Bank of France
is expected to keep rates unchanged when the Monetary Policy
Council meets tomorrow. The French credit market is focussed on
today's May industrial production (expected +0.4% m/m, +7.1% y/y)
and tomorrow's Jun household consumption (May +0.4% m/m, +6.3%
y/y).
The 10-year Notional yield closed down -2.3 bp at 4.765% after
posting an all-time low yield of 4.758% on Jul 10th. The Sep
Notional bond closed up +.20 at 105.04 after posting a contract
high of 105.21 on Jul 10th. The Dec Pibor closed -.010 at 96.185
after posting a contract high at 96.220 yesterday.
The CAC40 stock index yesterday closed 47 points lower at 4322
(-1.07%) as it retreated further from Monday's all-time high of
4405. The CAC40 is up 44.12% for the year-to-date in franc terms
and up 43.96% in US dollar terms. France Telecom (-4.99%) extended
its 2-day decline to 9.41% following the government's announcement
that it would sell off an additional $9 billion in shares. France
Telecom has the heaviest weighting by far, at 8.96%, in the CAC40
index.
UK -- The British financial markets are awaiting today's
release of the June retail sales report. Expectations call for a
-0.9% (mo-mo) drop and a slowdown to a +2.9% (yr-yr) gain. That
would mark the smallest year-on-year increase in 2-1/4 years.
While the weak report may calm some uneasiness about BOE policy
intentions, the weakness may be deceiving. Soft sales will likely
come as a result of the "World Cup" effect as consumers were glued
to their televisions, and as a result of the cold and wet weather
seen through much of last month.
Sterling yesterday settled +.25 pfennigs at 2.9381 DM, as it
rebounded above Monday's 5-1/2 week low of 2.9247 DM. On Monday's
low, the pound sold off by a total of 10.24 pfennigs from 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 little changed yesterday. The UK
credit market is focussed on today's Jun retail sales (expected
-0.9% m/m, +2.9% y/y) and tomorrow's Jun non-EU visible trade
deficit (expected -1.2 bln stlg) and May global visible trade
deficit (expected -2.2 bln stlg).
The 10-year gilt yield yesterday closed +2.0 bp at 5.860% and
held below the Jun 19th 2-1/4 month high yield of 5.931%. Sep
gilts yesterday closed unchanged at 108.45 where they remained
within the 3-week trading range. Dec short sterling yesterday
closed down -.010 at 92.200 where it remained above the Jun 16th
5-1/2 year low of 92.060.
The FTSE index closed 46.3 points lower yesterday at 6132.7
(-.75%). On Monday, the index closed at an all-time high
settlement of 6179.0. The FTSE is up 19.42% for the year-to-date
in sterling terms and up 19.28% in US dollar terms. A
disappointing earnings report from drugmaker Smith Kline Beecham
(-4.18%) spoiled sentiment yesterday. The other big contributor to
the FTSE's slide was another drop in the oil shares despite a rise
in oil prices.
Asian Comment -- Japan -- BOJ chief Hayami yesterday repeated
that the Policy Board continues to discuss the possibility of
easing monetary policy through cutting overnight rates or easing
reserve pressures. However, he said he does not favor an easing of
monetary policy. The BOJ in its monthly report released yesterday
was negative and said that the economy remains in a negative cycle.
The BOJ said that the government's recent 16 trillion yen stimulus
package is unlikely to lead to an immediate recovery but should at
least keep the economy from deteriorating further.
The Nikkei index yesterday closed down 14 points at 16,557,
consolidating below last Thursday's 3-1/2 month high of 16,757. On
last Thursday's high, the Nikkei index recovered sharply by 14.66%
(2,142 points) from the recent 6-month low of 14,615 (6/16/98).
The automakers contributed to yesterday's modest decline after they
reported that output and sales fell in June. The Nikkei is up
8.51% in yen terms and .93% in US dollar terms.
Sep Tokyo JGBs yesterdayclosed -.02 points at 131.87, mildly
above last Friday's 2-1/2 month low of 131.50. JGBs in the past
1-1/2 months have steadily sold off by a total of 2.93 points from
the contract high of 134.43 (6/5/98). In London, Sep JGBs settled
at 131.94, up +.07 points from the Tokyo close. The benchmark No.
182 10-year JGB yesterday closed +1 bp at 1.415%, well above the
recent all-time record low closing yield of 1.130% (6/2/98). The
Dec Euroyen yesterday settled +2.5 bp at99.195 and is just mildly
above the recent 3-1/2 month low of 99.145 (6/26/98).
Asian Stock Market Closes: Hong Kong Hang Seng +.84%,
Australia All-Ordinaries unch, Singapore Straights Times
Industrials -3.61%, South Korea Composite Index -.12%, Thailand
Stock Exch -3.49%, Taiwan weighted index -1.22%, Philippines
composite index +.47%, Malaysia composite index -1.68%, China SE
Shanghai A +2.05%, Indonesia Jakarta composite index -.09%.
OPTIMA FINANCIAL NEWS SCHEDULE^ Wednesday 7/22/98
A. Today's News (local & GMT release times shown)
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 $56.0 bln
surplus, June 1997 $54.635 bln surplus.
1430 ET 1830 Announcement of next week's 2-yr T-note
auction (expected $15.0 bln).
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
N/A Earnings: Allstate ($.73), Amgen ($.74),
Anheuser-Busch ($.77), Disney ($.21), Duke
Energy ($.68), DuPont ($.87), Lilly ($.43),
Lucent Technologies ($.27), Mobil ($.81), &
US Airways ($1.86).
UK 0930 UK 0830 June retail sales expected -0.9% m/m &
+2.9% y/y, May +1.7% m/m & +4.6% y/y.
GER 1800 CET 1600 ECB member Issing speaks in Frankfurt.
FRA 0845 CET 0645 May industrial production (excluding energy)
expected +0.4% m/m & +7.1% y/y, April
-0.7% m/m & +7.5% y/y.
N/A Prime Minister Jospin announces budget
framework to the Cabinet.
JPN 0850 JT June trade surplus expected 1.4 tln yen, May
1.2 tln yen surplus.
1400 JT 0500 BOJ releases minutes from the June 12th
Policy Board meeting.
N/A Finance Minister Matsunaga holds press
conference.
B. Future News
Sometime this week:
GER N/A June PPI expected unch m/m & unch y/y,
May unch m/m & +0.1% y/y.
N/A May retail sales, April real sales -2% y/y
(unadjusted) & -4.7% y/y (adjusted).
N/A June import prices expected -0.5% m/m &
-1.8% y/y, May -0.6% m/m & -1.6% y/y.
N/A Individual west German states release July
CPI reports.
N/A Preliminary July west German CPI expected
+0.2% m/m & +0.9% y/y, June +0.1% m/m &
+1.1% y/y.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 18th expected -20,000 to 316,000, last
-58,000 to 336,000.
1630 ET 2030 Money supply report for week ended July
13th; 1st-week reserves.
N/A Earnings: 3M ($.92), Boeing ($.33), Chevron
($.75), Dow Chemical ($1.84), Southwest
Airlines ($.54) & Union Pacific (-$.17).
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 expected unch
m/m, 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 surplus expected 14.0
bln francs, 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 expected -0.4% to
4.80 mln units, May +1.0% to an annual rate
of 4.82 mln units.
1300 ET 1700 Weekly Treasury auction of $13.0 bln in 3 &
6-month bills, unch from last wk (pay down
$75 mln).
Tue US 0900 ET 1300 BTM/Schroder weekly retail sales, last -0.9%
w/w.
1000 ET 1400 Conference Board releases its July consumer
confidence index expected -1.4 points to
136.2, June +1.4 points to 137.6.
1440 ET 1840 Redbook retailer sales survey for week ended
July 25th, 1st 2-weeks +0.7%.
JPN N/A BOJ Policy Board meeting.
Wed US 0830 ET 1230 Advance June durable goods orders expected
-0.5%, May -2.7%.
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.
UK 0930 UK 0830 Final June M4 money supply, preliminary
report was +0.7% m/m & +9.0% y/y.
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 expected +0.8%
q/q & +3.3% y/y, Q1 +0.7% q/q & +3.3% y/y.
1000 ET 1400 June new single-family home sales expected
-1.3% to 878,000 units, 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 expected +1.0%, with
chain price index of +1.4%, 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%.
1000 ET 1400 Final July consumer sentiment index, early-
July -0.8 points to 104.8.
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.
UK 0930 UK 0830 July M0 money supply, June +0.2% m/m &
+5.5% y/y.
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 (expected: $16.0 bln in 5-year
notes, $12.0 bln in 10-year notes, & $10.0 bln
in 30-year bonds).
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 -1.8%.
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.
COPYRIGHT, 1982-1998, OPTIMA INVESTMENT RESEARCH, INC (312-427-3616)~
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