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.