Financial Update

· TSX -239.14pts (Reuters) to its lowest close in 2 weeks as a slide in oil prices shook the resource-heavy market, while the suspension of Canada's Parliament weighed on sentiment. The drop in the financial index came after 3 of the 4 Canadian banks that reported reporting quarterly earnings on Thursday posted lower profits and offered little in the way of outlook for 2009.
· DOW -215.45pts
· Dollar -1.54c to $78.24US. after rising on news of the suspension of parliament it fell nearly 2% in less than 90 minutes after leaders of opposition parties said they still aim to oust the country's Conservative government from power.
· Oil -$3.12 to $43.67US per barrel. more than 6% to the lowest level in almost 4 years in response to further bleak economic data that could spell a deeper decline in global energy demand.
· Gold -$5.00 to $763.80US per ounce
· www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices

As central banks around the world injected historic interest rate cuts into a rapidly deteriorating global economy Thursday, the spotlight fell squarely on the Bank of Canada, which has the added challenge of having to craft monetary policy amid intense political and fiscal-policy intrigue on Parliament Hill.

The European Central Bank cut rates three-quarters of a percentage point to 2.50%, the biggest amount in its 10-year history, Sweden slashed by a record 1.75 percentage points to 2% and the Bank of England cut rates a full percentage point to 2%.

Central banks are racing to catch up to a dramatic slump in global demand in recent weeks as the credit crunch and collapse in consumer and business confidence slashes factory production, sales and jobs around the world.

Next week is the Bank of Canada's turn. Analysts expect the bank to announce a 50 basis point cut on Tuesday, taking the overnight rate down to 1.75%, though money markets were betting it could unleash a more aggressive 75-basis-point chop.

"That's the below the radar play that's gaining some credence," said Eric Lascelles, chief economics and rates strategist at TD Securities. "You have to admit when you see central banks around the world cutting by 75, 100, 175 [basis points] in some cases, it suddenly seems plausible the Bank of Canada could cut by 75."

But Mr. Lascelles was sticking with his half-point call as of Thursday, saying a jump from a quarter-point cut to three-quarters might signal the bank had made an error in judgement somewhere along the way.

Derek Holt, vice-president of economics at Scotiabank, also believes Mark Carney, the Bank of Canada governor, will side with a 50-basis-point cut.

"He's been reticent to make those big calls in the last little while," Mr. Holt said. "I think 50 would be a material step in the direction of keeping some powder dry for when he can see the data deteriorate further and in our forecast, it's early next year."

The Bank of Canada makes its decision on interest rates as the drama continues to unfold in Otttawa. Prime Minister Stephen Harper won his government some time yesterday when the Governor-General Michaelle Jean agreed to prorougue Parliament.

It is likely that when the government returns with a budget on Jan. 27 it will contain some bold fiscal measures such as heftier spending on infrastructure or new tax cuts in order to try and win over a furious Opposition. The Opposition could nevertheless vote the budget down and fiscal stimulus could be delayed if a new election is called.

While the Bank of Canada is fully independent from the government, it takes into account fiscal measures that affect growth and inflation.

"Of course fiscal policy and monetary policy need to work in unison to achieve a particular goal and conceivably if you were to get a new government that was more committed to fiscal stimulus, could that decrease the need for monetary stimulus?" Mr. Lascelles said. "I suppose it could."

He added that with the political and fiscal situation so uncertain the central bank will likely put those considerations on the back burner for this announcement.

Mr. Holt added the bank will likely take the view that any government stimulus will be slow to hit the economy.

"The lags on fiscal policy around the world even for [President-elect Barack] Obama's plans to hit the ground running in January -- by the time you put out the tenders, prioritize the projects, get the suppliers all lined up, do your environmental and regulatory approvals -- it's a year before this stuff really hits the economy," he said. "So for monetary policy that means in the short term, economies around the world are much more reliant on central bank cuts."

The bank's main focus will be on the underlying economy, which has held up better than most so far but yesterday issued some worrying signals: the value of building permits plummeted 15.7% in October from September; the Ivey Purchasing Managers index dropped to its lowest on record at 40.2 in November from 52.2 in October; and bankruptcies surged 21% year-over-year in October.