Financial Update

Economy showing signs that worst is already past: economists

· TSX +9.61.
· Dow +66.20
· Dollar -.15c to $ $99.57
· Oil -$1.58 to $124.22US per barrel
· Gold -$3.10US to $865.40US

Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html

By Julian Beltrame, The Canadian Press

OTTAWA - The loonie once again worth about the same as the U.S. greenback, employment, exports and consumer spending continuing strong - what is happening to Canada's year of economic discontent?

Just as the Canadian and U.S. economies were expected to be at their gloomiest - falling into negative numbers or close to it in the second quarter - some economists are entertaining the notion that the worst may already be in the past.

"What's with the doom and gloom in Canada lately?" asked BMO deputy chief economist Doug Porter this week in a list of 10 reasons to feel good about the economy.

Among the categories - strong income growth and employment, no real credit crunch, rising equity prices, a surprising trade surplus and a healthy housing market.

"We know that bad news sells, but this is ridiculous," Porter said of the hand-wringing in face of the positives.

Even in the U.S. - which is the real threat to the Canadian economy in terms of falling exports - the news has not been as uniformly bad as most economists had been forecasting for months, and the talk that the U.S. had already dipped into recession has not been supported by the numbers.

Growth in the U.S. has been tepid at best at 0.6 per cent the past two quarters, but it has remained above the line. And while many had pointed to the second quarter as the time the American economy would cross the line, the early numbers are at best mixed.

This week saw another "surprise" when the U.S. Commerce Department reported retail sales had actually risen 0.2 per cent in April, or 0.5 per cent if auto sales are excluded.

Meanwhile financial markets, a key factor behind of the U.S. slump, are showing signs of normalizing, according to Federal Reserve chairman Ben Bernanke, although he stressed they are far from back to normal.

And the U.S. dollar continues to firm against most currencies except Canada, where the loonie is bucking the trend and slowly gaining on the greenback.

The Canadian and American dollars have been flirting with parity. On Wednesday, the loonie peaked above US$1 before falling to close at 99.57 cents U.S. on Wednesday, well up from the recent low of 97.61 cents on May 2.

That's not the best news for manufacturers, who prefer a weak dollar to make their exports cheaper in the U.S., but it will be welcome by Canadians who plan to cross the border for a summer vacation this year.

"The Canadian dollar will probably be stronger this summer than I thought it would be," said RBC currency strategist David Watt. "I think it will likely trade at around parity or just above over the next few months."

The big reason is oil trading at record highs near US$125 a barrel, but another is natural gas - which represents a bigger net Canadian export commodity than crude, and which has seen prices firm to above $10 per 1,000 cubic feet from about $7 at the end of 2007.

Global Insight economist Dale Orr cautions that while some signs have been encouraging, it is too early to break open the champagne.

It is now likely that the U.S. will avoid a classic recession defined as two quarters of contraction, although growth this quarter may dip into the negative side. But nobody should confuse that with a healthy economy, he added.

"Sure the U.S. economy is going to be picking up sharply from here to the end of the year, but that's probably going to be overwhelmingly because of the U.S. government fiscal rebates (about $600 per individual) that's worth about one per cent of gross domestic product," he explained.
"Now the real issue is, when we get to the first quarter of next year, are we going to be faced with weak fundamentals that take us back to almost zero growth or will all the monetary easing kick in to keep them afloat."

Another indicator of how the economies in Canada and the U.S. are faring comes Thursday when both countries report on the latest manufacturing activity, which is expected to show some growth in Canada.

A quicker than expected turnaround in U.S. growth and consumer spending would help Canadian exports to the country - the only real weakness in the Canadian economy, said Bank of Montreal economist Michael Gregory.

Yet he is not convinced the relatively good news means the U.S. or Canada are out of the woods.
"I don't know many people that can tell the difference between minus 0.5 per cent and plus 0.5 per cent growth, either way it feels bad," he pointed out.

But his colleague, Douglas Porter, would rather look at the glass as half full. He points out that economists have been too quick to accentuate the negative and even interpret good news - like last week's $5.5 billion trade surplus, the largest since last May - into bad by emphasizing that volumes of exports declined. "The glass is more than half-full in Canada and the global economy is in a lull in the middle of one of the greatest booms on record," he noted. So Canadians should stop "obsessing" about what he called a "temporary bout of cyclical weakness."

Financial Update

Economy resilient, Flaherty declares

The Canadian Press Finance Minister Jim Flaherty says the Canadian economy is facing a variety of economic challenges, but has so far remained resilient. "Certainly there has been a psychological effect of the recession in the U.S. housing sector, but keep in mind Canadian projections are on the positive side of the ledger,'' he told the Economic Club of Toronto yesterday. Flaherty acknowledged that Canadians face rising costs, including food prices and higher airline fees tied to fuel. But, Canada hasn't seen the same type of inflationary impact that other countries have experienced

· TSX jumped +144.88 to a new record high
· Dow +130.43
· Dollar continued upwards +.12c to $ $99.56
· Oil -$1.73 to $124.23US per barrel
· Gold -$.80US to $883.70US

Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html

TSX soars to new record thanks to RIM, EnCana

David Friend The Canadian Press

Two of Canada's most valuable companies have helped lift the Toronto stock market above its previous record high, set 10 months ago just before the credit crunch took the life out of many investments.

But some economists suggest the gains could wash away in the foreseeable future.
Both Research In Motion, the maker of the famed BlackBerry portable device, and oil and gas giant EnCana Corp. drove the market skyward yesterday. The two stocks were heavily traded, with RIM shares up eight per cent and EnCana ahead six per cent. Both stock jumps were motivated by corporate announcements, with EnCana saying it will divide itself into two companies, one focused on the oilsands and another concentrating on natural gas.

RIM investors gave its stock a boost after the company unveiled the new BlackBerry Bold smartphone, which has a wider array of functions aimed at the business market.
The two companies' combined weight pushed the TSX at the end of the day to 14,666.07, above a high of 14,625.76 set last July.

It was the third attempt the Toronto stock market has made at returning to the heights it left when the U.S. subprime mortgage mess surfaced. Last Thursday, the TSX just missed the benchmark despite a record-high closing price for crude oil.

The increase will likely evaporate somewhat if the two companies can't sustain their charge as the week progresses, said Fred Ketchen, a manager of equity trading at Scotia Capital. "We're going to give back some of these gains somewhere along the way,'' Ketchen said. "But if I keep looking out, I don't see the demand for energy backing off any time soon.''

Much of the momentum has been caused by strength in resource stocks, which represent about one-third of the market capitalization of the TSX. The energy sector has climbed 40 per cent since January while the price for crude oil rose above $125 US.

Financial Update

· TSX fell -86.80 as profit-taking cooled the energy sector even though oil prices hit
another record high
· Dow -120.90
· Dollar recovered over a full cent +1.12c to $ $99.44
· Oil continues upward +$2.27 to $125.96US per barrel breaking new records daily
· Gold recovered another+$3.90US to $884.50US

Bond Rates: <http://www.bankofcanada.ca/en/rates/bonds.html> http://www.bankofcanada.ca/en/rates/bonds.html

TSX could break out into record territory this week; then what?

By Malcolm Morrison, The Canadian Press

TORONTO - The Toronto stock market is poised to break through its old closing high set last July during the week as commodity stocks, particularly oil, run ahead.

As it was the TSX came within a whisker of moving past the 14,625.76 level last Thursday thanks to yet another in a string of record high closes for crude.

The market then pulled back Friday, at the end of a week of sharp gains, largely fuelled by energy stocks, that saw the TSX up 1.77 per cent for the week.

Breaking past that July record represents a stunning 20 per cent surge in the index since hitting its most recent low Jan. 21 - but some analysts are uncomfortable with how narrowly based the advance has been.

"Obviously it's being supported by the resource sector yet again, which is basically the story for the past three or four years," said Andrew Pyle, investment adviser at Scotia McLeod in Peterborough, Ont.

"I mean, if you look at the divergence between the S&P 500 and the TSX, that gap has widened and widened in relation to the strength we've seen in resources and obviously that's what's pulling the TSX higher now."

The energy sector has roared ahead 40 per cent since January while the base metals sector jumped 29 per cent as crude oil jumped from about US$90 a barrel to the US$125 mark.

The gold sector hasn't done so well, down about four per cent as bullion slipped away from the US$1,000 an ounce level.

This is the third time the TSX has tried to break above that 14,626 level and Pyle thinks this will be equally unsuccessful since "there is no underlying fundamental reason for the TSX to break above a new record high."

In fact, he said "there are a lot of reasons for this index to buckle and to experience a sharp pullback like we have seen in the past."

For one thing, he points to weakening economic conditions which should curb oil prices.
"Things work for the lag," he said.

"Oil at $120 doesn't show up tomorrow morning in terms of European Gross Domestic Product numbers, it'll show up in the summer, in July and August and demand factors alone will be enough to pull oil back."

But Pyle also pointed to a healthier U.S. dollar, which has been mending in particular since the U.S. Federal Reserve signalled last month that the long string of interest rate cuts are over.

"And I think if people start to really accept that the U.S. dollar recovery is real - it might be very slow - that to me is the death knell for commodities near term," he said.

"Near term, if the dollar recovery is perceived as real, I think commodities have to fall back here and when I look at the TSX again, it's very thinly based and I would say right now there's a lot more risk to the TSX today at these levels than there was last year when we were looking at record highs in July."

At least at that point, most sectors were participating in the run up.

A notable exception to the charge ahead this time has been the financial sector, up only about six per cent since late January. Share prices in banks really only started to improve after mid-March when JPMorgan Chase picked up rival investment bank Bear Stearns, with the backing of the U.S. Federal Reserve.

"But even if financials hold ground here, and we get this split, financials doing OK, resources falling back, there's not enough weight in financials to keep this index from falling back," said Pyle.

"There's not going to be enough support... to push this index far into new record territory in my opinion."

Pyle's advice to investors if the TSX can't stage a convincing breakthrough past the 14,626 level is beware.

"I think you have to seriously look at a more defensive position going into the summer because you could be looking at a 10 per cent correction in the index."

In the meantime, "don't be greedy. If you're up, this has been great, look at a nice move of 2,000 points on the TSX, that's helped people a lot. Don't blow it. Don't have that in vain, take some of it off the table."