Financial Update May 26, 2009

Financials send TSX higher amid investor optimism over bank earnings

 TSX+76.08
 DOW -14.81(unchanged with Memorial Day holiday)
 Dollar -.25c to 89.01USD
 Oil -$.46 to $61.21US per barrel
 Gold +$7.70 to $958.50USD per ounce (unchanged)
 Canadian 5 yr bond yields +.01bps to 2.28

 http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us

Where will the breaking point be for banks to trade competition for profitability? Rates are artificially low with these spreads. Watch for rate increases

The yield, rate of return on your bond, can be read through a yield curve, which is the pattern of yields on bonds. This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise

The next decade: Return to growth, high loonie and western economic power
Julian Beltrame, The Canadian Press OTTAWA - Canadians can look forward to a sustained period of strong growth in the next decade, but one that will be different from the rise that came a cropper in the last, says a new report.

Canadian Imperial Bank of Commerce (TSX: CM.TO) economists say the next decade will bring major fundamental changes to the world economy, and a bit of deja vu for Canada, with the return of Western power, a high-flying loonie and surging stock values.

The major change is that Canada's economy will be less dependent on consumers or the United States, says the report written by economists Avery Shenfeld and Benjamin Tal.

Overall, it's a rosy picture of a decade that begins slowly next year but picks up steam based on global growth and surging consumer demand in newly-rich emerging economies like China and India, as well oil-rich countries from the OPEC nations and Russia.

"I am optimistic, particularly relative to those who say the global economy is in such a deep hole that even when we look over the medium turn we are going to be paying for it," said Shenfeld, the bank's chief economist.

"This is making the point that just because the last decade's growth included a lot of excessive leverage that came to ruin, it doesn't mean we are doomed for a slow decade of global growth ahead."

Excessive leveraging, or irrational consumer spending on borrowed money, will result in a sea-change in attitudes in the U.S., but also Canada and many other industrialized nations. But emerging economies, with their newfound wealth, will likely more than take up the slack.

Canada's economy will get a boost from exports, particularly commodities, whose prices will get back some of their lustre as demand in emerging markets grows.
"We're not going to break our ties to the US economy," said Shenfeld, "but what we sell to the world will be much more driven by demand coming from East Asia and even (the raw materials) we sell to the U.S., the price will be more determined by East Asia."

The diminished importance of the U.S. will impact the currency, the report states, forecasting a 20 per cent tumble during the decade. In part, the devaluation will be based on high inflation caused by the Federal Reserve's current quantitative easing policies that are massively increasing the supply of dollars.

That, in turn, will push the loonie above the U.S. dollar again, damaging central Canada's manufacturing sector and forestry exports, but boosting the West's resource sector.

Rising resource prices will re-ignite capital-intensive development of the oilsands, natural gas projects and metal mines, the report states.
"It'll be a bit of a return to some of the boon days we saw a couple of years ago," Shenfeld said.

One sector that won't bounce back as strongly is housing. The report sees housing starts averaging a tame 170,000 in the next decade, after being above 200,000 for most of the current decade.