Financial Update

There was barely a whimper when the price of oil raced passed key milestones this decade – $50 (U.S.) a barrel, $80, even $100.But with oil gaining strength at more than $130 a barrel, “shock” and “panic” have suddenly entered the popular lexicon. See article “A NEW KIND OF ENERGY CRISIS” below.

· TSX + 166.49

· Dow +45.68

· Dollar remains above par +.35c to $101.02

· Oil +$2.18 to $131.03US per barrel

· Gold -7.40US to $900.500US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>

CIBC loses more than $1-billion TARA PERKINS Globe and Mail Update May 29, 2008 at 9:42 AM EDT

Canadian Imperial Bank of Commerce, the last big bank out of the gate with its second-quarter results, said Thursday it lost $1.11-billion, down from a profit of $807-million a year ago.

Bankers see signs of credit crunch easing

JOHN PARTRIDGE AND TARA PERKINS Globe and Mail Update

Both the Bank of Canada and one of the country's major commercial banks say the credit crunch is easing, although analysts argue it depends on how you measure the situation.

The central bank said Tuesday market conditions have improved, prompting a decision to cut by half the amount of cash it has been regularly lending commercial banks to keep the financial system liquid.

“The decision to reduce the amount of term financing outstanding reflects the general improvement in market conditions since the end of April, including funding conditions out to three months,” the central bank said in a statement.

Separately, Bank of Montreal chief executive Bill Downe said there are signs the impact of the crunch, which began with the U.S. subprime mortgage crisis last summer and has stung financial institutions around the world, is dissipating.

“Our outlook is improving as there are indications that concerns are easing in credit markets as credit spreads are trending towards more normal levels and we are encouraged by these developments,” Mr. Downe said as BMO reported a dip in profit for the second quarter.

Bank of Montreal said the global markets that banks tap for funds have improved in recent weeks. Spreads on investment grade corporate debt are decreasing, while the gap between the rates at which banks borrow money and treasury bill spreads have also been shrinking.

Also helping the outlook is the continuing support of central banks, which have been injecting liquidity into the market, BMO said.

The Bank of Canada said it will make $1 billion available in the next 28-day purchase and resale agreement auction when the previous $2 billion injection matures on May 29.

The central bank has been rolling over $4 billion in liquidity injections in $2-billion instalments on a regular basis since the beginning of the year.

Bank governor Mark Carney said last week the turbulence which hit credit markets last summer was easing, although he said he was not ready to declare the crisis over.

The bank said future roll-overs will be reviewed in light of conditions in financial markets.

Financial services analysts agreed the narrowing spreads between corporate and government bonds is a good sign.

However, Mario Mendonca at Genuity Capital markets in Toronto also offered a counterpoint.

If instead of looking at credit spreads, one looks at the “real economy,” the picture is nowhere near as bright, particularly the U.S. housing market, where the crunch began and which continues to deteriorate.

“So I think there are two sides to this,” Mr. Mendonca said. “You could look at what the bond market is saying in terms of credit spreads and call it ‘easing,' or you could look at the real economy and say ‘no, it isn't.'”

Michael Goldberg at Desjardins Securities expressed a similar view. “House prices in the U.S. are [still] falling, and that's not good,” he said.

However, it does look as if liquidity issues are “getting to be a little less severe,” and this means that in the second half of this fiscal year, Canada's banks will likely see a return to a more normal credit cycle “whose severity depends on how deep the economic downturn in the U.S. is.”

With files from The Canadian Press

A new kind of 'energy crisis'

Despite pain of high prices, there are no shortages or lineups

BARRIE MCKENNA AND RICHARD BLACKWELL From Thursday's Globe and Mail

There was barely a whimper when the price of oil raced passed key milestones this decade – $50 (U.S.) a barrel, $80, even $100.

But with oil gaining strength at more than $130 a barrel, “shock” and “panic” have suddenly entered the popular lexicon.

Ominous comparisons are being made to the devastating oil jolts of the 1970s. And a global economy that once seemed immune to expensive oil is getting antsy.

Sometimes violent protests swept across Europe and Asia this week. Even in the United States, where cars are a religion, Americans are driving less for the first time since 1979, spurning SUVs and embracing public transit.

Hundreds of truck drivers protested in London this week, adding their voices to global worries about rising gas prices.

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Warning that the United States is facing “a true energy crisis,“ Dow Chemical Co. chairman and chief executive officer Andrew Liveris said Wednesday that the chemical maker is raising prices by up to 20 per cent to cope with a quadrupling of its energy and fuel costs since 2002.

“For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy,” Mr. Liveris said.

He complained that U.S. industry is losing ground to competitors abroad and is facing “demand destruction” at home. But is this an energy crisis? That may be in the eye of the beholder.

Unlike a recession, which can be tracked and quantified, a crisis is about what an environment feels like. If you're an auto maker or an airline, you're in full crisis mode.

The sheer magnitude of the recent spike is impressive. Oil is up nearly 50 per cent this year and 85 per cent in the past two years. And adjusted for inflation, oil has never been this expensive.

But for pure shock value, the recent runup still pales compared to 1973.

That's when oil shot up nearly fivefold (to $12 a barrel from $2.50), or 1979, when the price of oil more than tripled (to $40 a barrel from $12).

There are no embargos, no shortages and no lack of crude to feed refineries – as there were in the 1970s – and this isn't yet a crisis, says Robert Ebel, a former energy specialist at the U.S. Central Intelligence Agency

The main threat now, he said, is inflation.

“It's basically a price problem,” said Mr. Ebel, a senior adviser at the Washington-based Center for Strategic and International Studies. “It's beginning to hurt. You see it at the grocery store. You see at the gas station. It's having an effect on every segment of the economy.

It's something people are going to have to adapt to.”

Unfortunately for truckers, consumers, manufacturers, even fishermen, experts such as Mr. Ebel insist there's little governments can do in the short term to relieve soaring prices. Reducing gas taxes, for example, would only boost demand and lead to even higher prices down the road.

In Britain, where truckers have blocked key highways in London this week to protest fuel prices, Prime Minister Gordon Brown warned that the “global economy is facing the “third great oil shock of recent decades.”

Writing in the Guardian newspaper, Mr. Brown called on world leaders to devise a “global strategy” at next month's Group of Eight meeting in Japan, including emergency talks with major oil-producing countries and a renewed push for efficiency and alternatives. “A global shock on this scale requires global solutions,” he said.

French President Nicolas Sarkozy called for a Europe-wide cut in fuel taxes as protesting fishermen blockaded an oil depot near Marseille.

In Canada, many executives are loath to describe the spike in prices as a “crisis,” although they acknowledge they're adjusting business plans to deal with the new reality.

“I don't know if I'd say it's a crisis, but it certainly keeps you awake,” said Colin MacDonald, CEO of Halifax-based Clearwater Seafoods Income Fund.

High fuel prices have driven up the cost of operating its fleet of fishing vessels. The company is trying to become more efficient by using larger and more efficient boats, he said, but fuel costs have still boosted the input price of its products by 30 to 40 cents (Canadian) a pound this year.

At the same time, the cost of moving processed fish to markets around the world is rising, because transport companies are adding surcharges to help defray their fuel costs. And supermarkets and restaurants are reluctant to pay more.

Tom Winkler, chief financial officer at the Vancouver Port Authority, said the volume of goods handled through the facility could be hurt if higher fuel prices – and resulting surcharges shipping companies charge their customers – result in fewer containers of goods moving from Asia to Canada.

But the squeeze hasn't yet reached a crisis point, he said.

Economists at CIBC World Markets predicted this week that higher oil prices will result in less movement of global freight as companies look for local suppliers of goods.

Other companies that are taking a major hit from high fuel prices are also trying to see a silver lining.

At bus line operator Greyhound Canada, high fuel prices “drive our costs up through the roof,” said Randy Padley, director of passenger services for Eastern Canada.

At the same time, however, high pump prices “also drive people from their vehicles to the bus, so it's a double-edged sword,” he said. And Greyhound has already raised ticket prices and will do so again if it becomes necessary.

At Big Rock Brewery in Calgary, high energy prices have a significant impact on transportation costs, CEO Edward McNally said. “The truckers have been raising prices for a year or more.”

But spiking energy costs are also affecting the price of aluminum cans, and indirectly making barley more expensive. Big Rock is hedging its barley purchases, which helps, but has not made similar moves with aluminum, Mr. McNally said.

It is also focusing on selling to local markets, where it has an advantage over big Canadian rivals and importers, which now pay sharply higher shipping costs to get their beer to market in Alberta.