Financial Update for Feb. 19, 2009

· TSX-202.75(Reuters) for a third straight session, touching a 2009 low, pressured by weak energy and financial issues and a slide by Rogers Communications Inc.
· DOW +3.03 New York markets were little changed despite the announcement of a plan from U.S. President Barack Obama to deal with the home foreclosure crisis
· Dollar +.35c to 79.48USD
· Oil -$.31to $34.62US per barrel. as another dose of bad economic news only raised concerns about the global downturn's impact on energy demand.
· Gold +$10.70 to $977.70 USD per ounce The lone sector in positive territory was the resource-laden materials group, as gold prices got a boost as investors sought refuge from economic gloom.
· Canadian 5 yr bond yields +.07bps to 2.07
· http://www.financialpost.com/markets/market_data/money-yields-can_us.html


Five issues Harper, Obama are likely to tackle

Craig Offman, National Post

As excitement builds for Barack Obama's first state visit to Canada on Thursday, so does the pressure on its frantic schedule.

At home, Mr. Obama is being pushed to address the environmental fallout from Alberta's oil sands or the injustices of our softwood lumber exports. Stephen Harper, on the other hand, faces calls to bring up the status of 22-year-old accused terrorist Omar Khadr or U.S. designs on oil deposits in the Arctic.

But a clenched-fist approach will not benefit Canada, diplomats say, especially when a profound economic crisis trumps all other issues.

"The stakes are too big to worry about the price of eggs in Quebec," said James Blanchard. A former U.S. ambassador to Canada during the Clinton administration, Mr. Blanchard predicts this will be a broad, big-picture, meeting in which new objectives supersede old resentments.

"I think that previous meetings have often been unsuccessful because Canada focused on the trees and the weeds, rather than the forest," he added.

"Over the years, our State Department has been quite amused that Canada avoids the big issues and focuses on the small ones.

"We'll typically leave those details and issues to the Cabinet, or frankly, the sub-Cabinet," Mr. Blanchard said.

Echoing other former ambassadors from both countries - including Canada's Allan Gotlieb and Paul Cellucci of the United States - Mr. Blanchard, foresees five concerns: protectionism, the effects of the bailout, the environment and energy and Afghanistan.

Given that the two sides have an hour on average to cover each topic during this speed-bonding session, lower-level diplomats will likely be left to sweat over the smaller stuff. "It needs to be big picture, and Stephen Harper knows that," Mr. Blanchard said. "It's not going to be nitpicking over wheat and lumber."

The Rise of Protectionism

"I'd expect the Prime Minister to point out the damage from protectionist activity," said Mr. Gotlieb, Canada's former ambassador to the United States during the Mulroney years. Reacting to an alarming rise in "Buy American" rhetoric, Mr. Harper will likely echo a message his ambassador, Michael Wilson, sent to the U.S. Senate recently: Canada is your largest-single customer, and if either of us throws up walls, it will hurt us both. The costs of doing business will actually increase. Delay and disruptions would ensue at our borders. Competitiveness would suffer, and in the end, both nations risk losing jobs, not creating them. Mr. Obama, who has spent a lot of political capital arguing the same point, would likely agree. "I'd also expect Mr. Obama to say that it's up to the United States to honour its international obligations," Mr. Gotlieb said.

Thickening of Borders

In an effort to protect the homeland from potential acts of terror, the United States has tightened security along the 49th parallel. But these chokepoints are literally costing both countries money: The thickening of the borders is damaging our respective economies.

In the past two decades, we have become joint producers on everything from films to auto parts - and the more goods, services and labour are held up at checkpoints, the less productive we become.

"We have to make sure the border is secure and facilitating," said Mr. Cellucci, who was U.S. ambassador to Canada during the first Bush administration.

Mr. Cellucci argued that the "smart border" program - which calls for "facilitating the free flow of people and commerce" - is working; other diplomats would say that Canada's greatest advantage, proximity, has turned against us in the post 9/11 era.

"The thickening of our border has become our comparative disadvantage," said Mr. Gotlieb, reversing the gains made by the free-trade agreement signed by his former boss and Ronald Reagan in 1988. This is a major weakness at a time when we compete with one-stop exporters such as the European Union and China. Look for the two leaders to announce efforts to initiate research into a smarter border program.

Marrying the Environment with the Economy

In a telling encounter with reporters last week, Canada's Environment Minister, Jim Prentice, described his new responsibility as balancing energy security, the economy and environment.

This widened purview perhaps reflects Mr. Harper's own micro green shift as he tries to engage the new President.

"It's important for the Prime Minister to talk about how we can work together to combat climate change while continuing to make sure that oil flows from the sands," said Mr. Cellucci, alluding to U.S. reliance on Canadian oil, which can run as high as 2.5 million barrels a day, making us its largest supplier.

As much as conservationists on both sides of the border criticize the oil sands, Mr. Harper will likely advance the argument that so-called "Dirty Oil" is no dirtier than coal or nuclear power.

Charles Doran, director of the Center of Canadian Studies at the Paul H. Nitze School of Advanced International Studies, said the two leaders would be shrewd to announce some kind of joint research and development project that would look for cleaner ways to extract oil from Northern Alberta. "That's something looks good, that is good, that is new – and that they could do together."

Bailouts

Even if Canada is emerging from this economic storm in better shape than the United States, a frenetic flow of goods and people inextricably links the two countries. In the course of one day alone, the equivalent of $1.5-billion in commerce and 300,000 people cross their common borders, an interdependence that also binds their financial health.

"These are not the conditions they wanted for the first meetings, but the reality is that everything will be focused on the bailouts," Mr. Doran said.

"They'll be discussing the efforts to recover from this recession or depression and the impact the policies will have on each other's countries." Mr. Doran points out, for example, that the trillion-dollar bailout in the United States might trigger massive inflation on both sides of the border.

Mr. Gotlieb, who was in Washington, D.C. during the Mulroney and Reagan years, suggested Mr. Harper could bolster the economic relationship by suggesting that the two meet each year around the same day to review policies, a top-down way of bonding and breaking down barriers.

"How else do you translate the recognition that we're most important trading partners and neighbours?" he asked. "By improving the relationship."
Canada's new role in Afghanistan

As recent as Tuesday, Mr. Obama did not overtly suggest that troops Canadian troops should stay beyond its 2011 deadline for withdrawal, but the omission might have been strategic: He still might want our soldiers to remain in a non-combative capacity.

Once in Ottawa, a very sensitive Mr. Obama will likely reiterate his gratitude to Canada for its sacrifice but will also reinforce his predicament: He has identified the region as the principal front in the war on terror, and the United States requires greater manpower there. So where does that leave Canada? While both leaders would probably agree that the re-emergence of the Taliban is an international concern, and that NATO should make a greater commitment to the imploding region, Mr. Obama might gently suggest Mr. Harper prolong Canada's mission beyond its 2011 deadline for withdrawal, offering its talents in a different capacity.

"I think there will be a discussion about what other things Canada can do to help," said Paul Cellucci. "Whether it be rebuilding the infrastructural needs, civil needs, the things Canadians are quite good at."