Financial Update

TSX slides as commodities tumble, central bank warns of recession

· TSX -455.60pts (Reuters)After big gains for TSX main index on Friday and Monday, investors returned to their selling ways
· Dow -231.77pts as mixed earnings reports persuaded investors to take some profits from Monday's big runup.
· Dollar -1.38c to $82.39US skidded to its lowest close in more than 3 years versus the U.S. dollar on Tuesday as BofC cut its key overnight interest rate and suggested more rate cuts may be needed. Lower oil prices often weigh on the Canadian dollar also because Canada is a key supplier of oil to the United States.
· Oil -3.36to $70.89US per barrel. Alarmed by the rapid slide, the Organization of the Petroleum Exporting Countries, which controls 40% of the world's oil supply, is holding an extraordinary meeting Friday in Vienna. OPEC's president, Chakib Khelil, said the group is planning to announce an output reduction that analysts believe could total at least one million barrels a day
· Gold +21.50 to $766.60US per ounce

Canadian bond prices all finished higher due to a sharp selloff in equities and the likelihood of more rate cuts in Canada "Some of the optimism we had seen on Friday and Monday is perhaps reversing and so money is flowing back into bonds," said Carlos Leitao, chief economist at Laurentian Bank of Canada. "

"In normal times, when you don't have a global credit crisis, you would tend to see . . . one-month rates, two-month rates, three-month rates, six-month rates, they would all decline big time," said economist Michael Gregory of BMO Capital Markets. "These are not normal times and those rates are not reacting in the same way."

Why the Bank of Canada pulled its punch

Jacqueline Thorpe, Financial Post While all about have been losing their heads, the Bank of Canada seemed determined to keep its Tuesday.

The central bank cut its benchmark lending rate a quarter of a percentage point to 2.25%, forgoing the more forceful half-point cut many Bay Street economists had pushed for amid signs the dramatic steps it has already taken to battle the credit crisis is beginning to bear fruit.

The clearest sign yet came Tuesday when Canada's commercial banks followed the central bank's move with a cut in their prime lending rate to 4%. Prime is the benchmark for consumer and mortgage loan rates across the country but banks had previously been hesitant to follow the Bank of Canada's cuts because the global financial crisis had driven up their own borrowing rates.

"TD Canada Trust's decision to lower its prime ... reflects [Tuesday's] Bank of Canada rate change, as well as the decrease in our cost of funds due to government actions and market forces, allowing us to pass the benefits on to customers," said Tim Hockey, president and CEO of TD Canada Trust, in a statement.

To be sure, the Bank of Canada is not suddenly predicting blue skies ahead. Its statement was, in fact, downright bleak, including the bold pronouncement the United States was "already in recession" - a word U.S. Ben Bernanke, the U.S. Federal Reserve chairman, has himself yet to utter.

The global economy too appears to be heading for a "mild recession" the bank said, as it drastically slashed its outlook for Canadian growth to 0.6% this year and next from much more optimistic forecasts of 1.0% and 2.3% respectively in July.

Indeed, its list of downside risks to the Canadian economy was long: weaker global growth will reduce demand for exports; sliding commodity prices which will depress the flow of income into Canada and in turn domestic demand, while the credit crisis is bound to restrain business and housing investment.

All will lead to "sluggish" growth through the first quarter of next year, though the bank stopped short of forecasting a recession for Canada. Growth is expected to eventually pick up in 2009 and the forecast is for a 3.4% burst of speed in 2010.

Derek Holt, one of the more bearish analysts on the Street, said the statement could have been written to accompany a 75-basis-point cut, let alone the 50-basis-point cut he advocated.

"It was the dead-on right statement but the wrong headline," said Mr. Holt, who says a Canadian recession is a foregone conclusion and predicts 50 basis points of cuts next time round in December.

And yet, the bank held back its heavy fire-power.

It highlighted three reasons. First the recent sizeable depreciation of the Canadian dollar will provide an "important offset" to slower global growth and commodity prices, the bank said.

The loonie sank another US1.38¢ Tuesday to US82.39¢, bringing it down 20% from July.

Secondly, the bank pointed out it has already meted out much assistance - 2.25 percentage points of rate cuts since last December, including a half-point emergency cut in co-ordination with other central banks on Oct. 8, a move it called "extraordinary."

Other "extraordinary" measures major economies have announced to stabilize the financial system - including capital injections directly into banks in some countries - will be pivotal to resuming the flow of credit and Canada's economy and "strong" financial system will benefit directly, the bank has said.

The Bank of Canada itself has injected billions of dollars of liquidity into Canadian money markets, and is now accepting a wider array of collateral from institutions for borrowing. The government, meanwhile, has announced a plan to buy up to $25-billion in mortgages to free up space on bank balance sheets for lending.

Ottawa Tuesday informed Bay Street it would step up the plan. The government said it will buy up $7-billion in mortgages Thursday, following strong demand from banks in the first round, which saw institutions sell $5-billion in mortgage-backed securities to the government.

All these measures have eased borrowing costs considerably for Canadian banks. The rate on overnight borrowing between banks has dropped to about 2.62% from a peak in early September of 4.83%.

Bay Street is also pushing for Ottawa to guarantee new bank borrowing to help them better compete for financing with institutions from other countries that are receiving more government support.

While the message from the Bank of Canada Tuesday was be patient, it did indicate it could easily drop interest rates further if conditions warrant, saying some "further monetary stimulus will likely be required."

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Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 9 December 2008.

Financial Update

Oct 21 9am Bank of Canada lowers overnight rate target by 1/4 percentage point to 2.25%

Stock Markets Soar
· TSX +688.91pts soared more than 7%in a broad-based rally as resource issues climbed on strength in underlying commodity prices.
· Dow +413.21pts
· Dollar -.48cto $83.77US .
· Oil +2.40to $74.25US per barrel jumped more than 3% lifted by expectations that OPEC ministers will agree to cut production at an emergency meeting set for Friday.
· Gold +2.50 to $787.60US per ounce

Fall in interbank rates raises hopes

Jamie McGeever/Richard Leong, Reuters LONDON/NEW YORK -- Global interbank rates fell sharply on Monday, fuelling hopes that central banks' massive efforts have succeeded in unlocking credits for cash-strapped banks and borrowers.

Other measures of credit stress ebbed to levels not seen in more than a month, prior to a worldwide rescue of the financial system whose foundation was shaken in the wake of the bankruptcy of Lehman Brothers.

U.S. Federal chairman Ben Bernanke said he was encouraged by the nascent improvement in credit conditions from measures to shore up the banking system and to ensure liquidity in certain securities like commercial paper. But it was too soon to conclude on their full impact, he told a Congressional panel.

Traders were guardedly optimistic, saying the jury is still out on whether money authorities have successfully navigated the credit market through the worst of the current crisis.
"We are still seeing a lot of difficulties to get through before we are out of the woods," said Martin Mitchell, head of government trading at Stifel Nicolaus & Co. in Baltimore, Maryland, "We are still concerned about Wall Street and consumers finding financing."

Governments around the world have pledged about US$3.3-trillion - about equal to the economic output of Germany - aimed at boosting interbank lending and shoring up their economies amid the global credit crisis.

Credit availability appeared to be on the rise after money markets plunged into near-chaos a month ago, which led to part and full government control of banks and financial companies in Europe and United States.

Less jittery banks charged each other less for dollars in the unsecured lending market. The London interbank offered rate for overnight dollars fell to a 4-year low near the Fed's target rate of 1.5%.

Traders widely expect the Fed to trim its target rate on overnight loans of surplus reserves between U.S. banks by at least another quarter percentage point after its two-day policy meeting next week.

More telling about a credit thaw was the plunge in longer rates suggesting banks grew more comfortable about lending rather than just hoarding cash.

The three-month Libor fell by 0.36 of a percentage point to 4.05875%, down 0.36 percentage point from Friday - the biggest one-day drop since late January.

Its spread over the expected three-month rate on the Fed's policy target rate, a closely-watched gauge of credit jitters, contracted below 300 basis points. At the height of the crisis earlier this month the spread was around 370 basis points.

Traders said a key catalyst for the drop in Monday's Libor fixings was one large U.S. bank lending up to US$20-billion in one-month dollar funds, pushing one-month interbank rates below 4% from around 5%.

The Wall Street Journal reported late on Friday JP Morgan led three U.S. banks pumping dollars into the system for European counterparts to access.

A particularly acute shortage of dollars in European and Asian trading hours since the collapse of Lehman Brothers in mid-September exacerbated the global credit crunch as banks hoarded dollars to bolster their own balance sheets rather than take the risk of lending it out.

More lending in the critical interbank market has spread to other credit areas.

The US$1.5-trillion U.S. commercial paper sector has improved, as creditworthy companies can raise money by selling these short-term IOU's at rates below the interbank market.

Overnight rates on unsecured CP dropped below 1% on Friday, while 30-year unsecured CP rates averaged as low as 1.43%, according to Fed data released on Monday.

More help is on the way in the CP market, where many companies had relied on funds for their day-to-day operations. The Fed will launch its program to buy high-quality CP next Monday.

Financial Update

Solid Day on Bay St

Former U.S. president Bill Clinton praises Canadian banking system

· TSX +292.52pts bargain-hunting came in force and the benchmark index posted a weekly gain of 5.5 percent, finishing at 9,562.49
· Dow -127.04pts
· Dollar -.38cto $84.25US due to nagging uncertainty about the outlook for the global economy, but a rally in stock markets and commodities help to cushion its fall.
· Oil +2.00to $71.85US per barrel recovered some on speculation that OPEC could slash output in an effort to stop crude's downward spiral
· Gold -$16.40 to $785.10US per ounce

(Reuters) - Brace yourself, but there's more bad news coming for Toronto stocks. When companies release their third-quarter results over the next few weeks, the accompanying earnings forecasts are likely to provide some pretty gloomy reading and may drive prices down further. Market focus will not be on the earnings themselves.

"(Forecasts) are what the market at the bigger level is looking at. Whether XYZ company beats or misses by a nickel is not the biggest focus over the next two or three weeks," said Francis Campeau, broker at MF Global Canada. And any market drops made on those forecasts could mark thebottom of the current fall, and the much-talked-of buying opportunity may finally be here.

Canadian Press VANCOUVER - Former U.S. president Bill Clinton is praising Canada's banking system.

Clinton, who was in Vancouver yesterday to speak to a business group, says Canadians are very lucky to have a government and system that encourages one of the best banking communities in the world.

The two-term Democratic president says if Canada keeps it up, it will avoid the banking mess being experienced in the United States. Clinton says U.S. and foreign bankers now will have to rely less on innovative financial products for profits than on old-fashioned lending to help produce goods and services.

Clinton's viewpoint got a quick endorsement from Public Safety Minister Stockwell Day, who was also at the event.

Day said Canadians should be reassured that one of the greatest U.S. presidents when it comes to economics thinks Canada is on the right track.