Financial Update For June 2, 2010

Bank of Canada raises interest rate, says considerable stimulus still in place Economic troubles around the world lead Governor Mark Carney to stay uncommitted to future rate rises
• TSX -191.02. as commodity stocks slumped after signals that China’s manufacturing industry is seeing slower growth.
• DOW -112.61 U.S. markets sank firmly into the negative as reports emerged saying Lebanon had fired on Israeli warplanes. This only added to the perception of global instability with Israel’s recent deadly raid of a ship carrying aid supplies, and escalating tensions between North and South Korea.
• Dollar -.95c to 94.88cUS fell against the U.S. dollar, hit by global economic fears and the failure of the Bank of Canada to provide a clear signal that more interest rate increases were in the works. Currencies usually strengthen as interest rates rise as higher rates attract capital flows. The currency was priced for a hike, so the market wasn't disappointed from that perspective. Quite simply it was the accompanying guidance that was somewhat more dovish than expected
• Oil -$1.39 to $72.58US per barrel. closed
• Gold +$12.60 to $1,224.80 USD per ounce closed

Carney plots cautious rate path
Jeremy Torobin Globe and Mail
Mark Carney is taking a cautious approach to raising interest rates, weighing Canada’s powerful economic rebound against the uncertainty of an “increasingly uneven” recovery across the globe.
The Bank of Canada Governor became the first central banker in the Group of Seven to raise borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.
Policy makers will keep an eye on Europe’s troubles, and won’t move more aggressively than they see fit, the Bank of Canada suggested, even though the economy is rebounding rapidly and inflation will likely exceed its 2-per-cent target this year. Much like in 2008 when the U.S. financial crisis pulled Canada into recession, the country’s economic health depends in large part on policy makers in other countries successfully containing homemade problems.
“Interest rates are incredibly low, given the strength of the domestic economy, but the global story is where it’s at right now,” Eric Lascelles, chief economic strategist at TD Securities in Toronto, said in an interview. “The level of uncertainty suggests there’s not a lot of confidence in the forecasts.’’ The open-ended nature of the announcement sparked a fall in the Canadian dollar and yields on two-year government bonds as investors pulled back their bets on what they had expected might be a series of uninterrupted rate hikes going forward.