US markets hit new highs

The global markets may have taken a breather last week but that ended Monday when they surged forward again. Led by New York’s Big Board Dow Jones Industrial Average, the index closed Monday night at a 2 1/2 year high of 10,702.51. The NASDAQ composite also pushed to its best finish in 2-1/2 years (up 29.96 to 2153.83 on the day), while the S&P 500 hit its highest close in 22 months (up 13.82 to 1155.37). Investors seem upbeat about upcoming earning reports both in the US and the UK. According to a UK survey, more than two-thirds of companies surveyed, expected business activity and orders to rise this year, while only 12 percent expects it to fall. Manufacturing has been the weakest part of the UK economy, and this news points to further evidence that the outlook for the sector is more positive. According to the survey, stronger UK and Global growth has been the cause of the optimism.

With the Monday rally in equities, US Treasury securities continued their fall in bond prices from last week, pushing yields higher. The US Dollar also continued its slide down the hill. Gold and oil also declined. The Bank of Canada cited a sharp rise in the Canadian dollar against the US Dollar, when it lowered interest rates last week to 2.5 percent. Both the Canadian dollar and the yen have come under heavy upward pressure in recent months as the US Dollar fell over concerns about the US current account deficit. In order to help fund the US government’s budget deficits, the US Treasury is now considering introducing a new 20-year bond into debt markets. Wall Street estimates a budget deficit in 2004 of between $400 billion and $500 billion. Prices of Treasury Friday of last week, which also pushed yields higher. The US does have a 10 trillion dollar annual economy though so we need to keep that in perspective as well.

We are reminded that the United States and Canada have the largest trading arrangement by far and that continued declines in the US Dollar will make it more and more difficult for Canadian Interests to remain competitive in the United States. Given that the US has 10 times more people, the shrinking export market will have to have serious ramifications to the Canadians. Looking at Europe, inflation fell by more than expected in December, as Eurostat, the European Union’s statistics office, said last week the annual rate of inflation was 2.0 percent last month, down from its estimate of 2.1 percent. During November of 2003, inflation was 2.2 percent. The ECB have projected an inflation rate of 1.8 percent for 2004. Apart from watching the earnings news, investors will be watching for new out of the US Federal Reserve’s first policy-makers’ meeting of the year carded for Tuesday and Wednesday this week. Although the US central bank is not expected to change its target for a key short-term rate or its outlook on the economy, investors will be very interested to see what they say about the economy, particularly the weaker employment numbers which continue to dog the recovery.

With the US economy sprinting but generating little inflationary heat, the United States Federal Reserve policy-makers (the US Fed) is likely to keep the accelerator on the floor and hold the federal funds rate, an overnight bank lending rate that is the basis for many banks’ prime rates, at one percent, a level not seen consistently since 1961. In closing, we expect interest to stay high as corporate earnings continue to be released but the age old saying “buy on rumour sell on news” may apply once the earnings season is over and economic news slows.

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