· TSX +94.47pts (Reuters) Late day buying saved the day after a seesaw volatile session that saw the TSX swing nearly 580 points from trough to peak
· Dow +172.04pts closed higher as investors wrestled with fears about the economy but also hunted for bargains after 2 days of selling
· Dollar -.06c to $79.64US.
· Oil +1.09to $67.84US per barrel.
· Gold -20.50 to $714.70US per ounce
(Reuters)Finance Minister Jim Flaherty announced the creation of the Canadian Lenders Assurance Facility, guaranteeing wholesale borrowing by the country's banks.
Flaherty said the temporary program will support the banks "on commercial terms so there is no expected cost to Canadian taxpayers," while stressing that Canada's lending institutions are solid and "the Canadian housing market is sound."
'The sky is not falling,' says BOC governor
Declines in housing market and commodities more rapid than expected
Jacqueline Thorpe, Financial Post
The Bank of Canada continues to believe Canada can avoid a recession this year and next, despite the protracted three-quarter recession it forecasts for the U.S. economy into 2009, a "mild" global recession, and "the deepest, broadest and most persistent financial crisis" the world has faced in decades.
The central bank forecasts real gross domestic product will expand 0.8% in the third quarter, followed by a contraction of 0.4% in the fourth quarter. Growth is expected to be flat in the first quarter of 2009 and to pick up to 0.8% in the second quarter.
Two successive quarters of contracting activity is technically considered a recession.
The bank believes Canada is starting from a better position of strength than many other countries going into the downturn, with a stronger labour market and better household and corporate balance sheets providing some support.
The "sky is not falling," bank governor Mark Carney said at a news conference after the document's release.
Still, it forecasts the economy will not do much better than flatline over the next couple of quarters as the global credit crisis will resolve slowly, putting the economy under strain.
Despite of the "healthy" position of Canadian financial institutions, the intensification of the global financial crisis has led to a "substantial" tightening of credit conditions in Canada, the bank said.
"Given the high degree of volatility and risk aversion in recent weeks, there is considerable uncertainty around any assessment of current credit conditions in Canada," the bank said. "In particular, it is difficult to measure the non-price factors that may limit the availability of credit."
Credit spreads between borrowing rates for financial institutions across curve and the expected overnight Bank of Canada interest rate spiked to around 200 basis points in early October.
While strong actions taken by central banks and governments to support financial institutions have lowered those spreads, the bank said they are likely only to recede slowly as confidence is gradually rebuilt.
Effective borrowing rates for financial institutions have, in fact, eased somewhat since August, thanks to the 225 basis points of cumulative interest rate cuts the bank has already implemented, the bank said.
"These indicative borrowing costs likely do not, however, adequately take account of the decreased availability coming from illiquid and risk-averse interbank markets," the bank admitted.
Non-financial firms, meanwhile, have had difficulty getting access to both short-term and long-term markets.
"Indeed, corporate debt and equity issuance have effectively stopped," the bank said.
The bank pointed out, however, that credit growth for Canadian households has slowed only slightly in recent months and there was little evidence terms or conditions have tightened significantly for household borrowers.
Still it sees growth of consumer spending receding after robust gains in recent years as real income declines with commodity prices, and household net worth takes a hit from sliding equity markets and a projected "modest" decline in house prices.
While it has been predicting a slowdown in housing activity and price gains for some time, the bank now says housing investment is declining more rapidly than it had expected. But it does not anticipate the same type of sharp housing contraction experienced by the United States.
The sharp decline in commodity prices has, like many, caught the Bank of Canada off-guard, and it is basing its projections on oil futures prices of US$81 to US$88 per barrel, though it projects a further 10% drop in non-energy commodity prices from current levels.
The bank has also revised down its estimate of Canada's potential output -- or the rate the economy can grow without generating inflation -- to 2.3% for 2008 and 2.4% in 2009.
The bank said it was encouraged by the loosening in global financial conditions in recent days. While one of the main risks to its outlook was that full recovery would take longer than expected, there is now the chance that measures governments and central banks have taken to restore liquidity and confidence will improve prospects more rapidly.
For the year as a whole, the bank repeated its Tuesday forecast that growth will average just 0.6% in 2008 and 0.6% in 2009 before picking up speed to 3.4% in 2010.
While the big jump in growth forecast for 2010 might seem sharp, it is not unusual by historical standards to see economies start to gain steam quickly once the worst of a crisis has past.
Friday, October 24, 2008
Thursday, October 23, 2008
Financial Update
Corporate earnings, tumbling oil prices give stock markets another pounding
Finance Minister Jim Flaherty is holding a press conference this morning before the markets open, announcing further steps to help Canada's banks weather the financial crisis, a package that's likely to include a pledge to backstop lending between financial institutions.
· TSX -558.92pts (Reuters) closed nearly 6% lower as resource issues sank along with commodity prices on concerns that a global economic slowdown will slash demand.
· Dow -514.45pts stocks tumbled to 5-year lows on recession fears after a run of disappointing profits and outlooks from major U.S. companies
· Dollar -2.69c to $79.70US A number of factors combined to push the Canadian dollar below 80 cents US for the first time in more than 3 years, but experts say it could actually help Canada weather a global economic slowdown. Canada's manufacturing sector suffered as the dollar soared above parity with the U.S. greenback over the past year, making Canadian goods more expensive for other countries and hurting export-based industries, the auto sector in particular.
· Oil -5.43to $66.79US per barrel.
· Gold -32.80 to $733.30US per ounce
(Reuters)NEW YORK -- Shares of Fannie Mae and Freddie Mac dove to their lowest levels in more than 18 years on mounting fears of a government bailout that would wipe out shareholders of the two U.S. housing finance giants. Freddie Mac executives are due to meet Treasury officials, possibly to get clarity about how the government will support the company and to reassure investors, according to The Wall Street Journal.
Fears the companies will need to be bailed out forced Freddie Mac to pay record high yield premiums on a US$3 billion debt sale on Tuesday. Freddie Mac's share slumped more than 24% to US$3.15, the lowest since 1990, and Fannie Mae shares slid more than 21% to US$4.74, the lowest since 1989.
Weakness in Canadian economy helping homebuyers
Garry Marr, Financial Post
There is some good news in the falling housing market, affordability is improving.
Desjardins Economic Studies says that after eight years of rising prices, housing costs are going down. "For the second quarter in a row we have had an increase in affordability," said Hélène Bégin, senior economist with Desjardins.
However, she warned consumers should not get too excited about the market conditions because affordability is still very close to the all-time low reached in 1990.
The Desjardins Affordability Index is calculated by determining the ratio between average household disposable income and the income needed to obtain a mortgage on an average-priced home, known as the qualifying income.
The report from Desjardins said its affordability index climbed to 110.7 last quarter after dropping close to 100 at the end of 2007. In the early 1990s, the affordability index was as low as 93.6. Desjardins says that affordability has increased by about 10% in the past two quarters because of falling home prices and lower mortgage rates.
The Canadian Real Estate Association said last week that the average price of a home sold in the country's major markets was $327,020, a 3.6% increase from a year ago. It was the second consecutive month prices had dropped on a year-over year basis.
Statistics Canada also said last month new homes prices grew only by 3.5% in June from a year earlier. It was the slowest rate of growth since March, 2002.
Desjardins noted that in the first half of the year, existing home prices rose by 4.4% compared to 10% a year earlier. The posted rate on a one-year mortgage also fell from 7.25% in March to 6.3% by the end of June. The posted rate on a five-year mortgage fell from 7.15% to 7.1% during the same period.
"House prices are just not going up as strongly as before and in some places in Western Canada, like Calgary, we have had some price drops. With the kind of return we have in Calgary, it has a big impact on affordability," said Ms. Bégin.
Prices in Calgary fell 7.8% in July from a year earlier, according to CREA. They were off 5.8% in Edmonton during the same period. Desjardins says affordability in Calgary improved by 7.5% over the last three months.
Even with the improved conditions, affordability is still off almost 30% from the peak reached in late in 2001. Long-term Desjardins thinks affordability will continue to improve. "Prices are going to go up slowly," said Ms. Bégin. "Out west we've seen a turning point where prices are going down."
The drop in prices is good news for home builders, according to the chief operating officer of the Canadian Home Builders' Association.
"If you were sitting in my chair what you would be experiencing is one very busy housing industry from coast to coast," said John Kenward. "There has been a slowing down in certain markets and builders in those market say it's a return to a more normal market place."
Finance Minister Jim Flaherty is holding a press conference this morning before the markets open, announcing further steps to help Canada's banks weather the financial crisis, a package that's likely to include a pledge to backstop lending between financial institutions.
· TSX -558.92pts (Reuters) closed nearly 6% lower as resource issues sank along with commodity prices on concerns that a global economic slowdown will slash demand.
· Dow -514.45pts stocks tumbled to 5-year lows on recession fears after a run of disappointing profits and outlooks from major U.S. companies
· Dollar -2.69c to $79.70US A number of factors combined to push the Canadian dollar below 80 cents US for the first time in more than 3 years, but experts say it could actually help Canada weather a global economic slowdown. Canada's manufacturing sector suffered as the dollar soared above parity with the U.S. greenback over the past year, making Canadian goods more expensive for other countries and hurting export-based industries, the auto sector in particular.
· Oil -5.43to $66.79US per barrel.
· Gold -32.80 to $733.30US per ounce
(Reuters)NEW YORK -- Shares of Fannie Mae and Freddie Mac dove to their lowest levels in more than 18 years on mounting fears of a government bailout that would wipe out shareholders of the two U.S. housing finance giants. Freddie Mac executives are due to meet Treasury officials, possibly to get clarity about how the government will support the company and to reassure investors, according to The Wall Street Journal.
Fears the companies will need to be bailed out forced Freddie Mac to pay record high yield premiums on a US$3 billion debt sale on Tuesday. Freddie Mac's share slumped more than 24% to US$3.15, the lowest since 1990, and Fannie Mae shares slid more than 21% to US$4.74, the lowest since 1989.
Weakness in Canadian economy helping homebuyers
Garry Marr, Financial Post
There is some good news in the falling housing market, affordability is improving.
Desjardins Economic Studies says that after eight years of rising prices, housing costs are going down. "For the second quarter in a row we have had an increase in affordability," said Hélène Bégin, senior economist with Desjardins.
However, she warned consumers should not get too excited about the market conditions because affordability is still very close to the all-time low reached in 1990.
The Desjardins Affordability Index is calculated by determining the ratio between average household disposable income and the income needed to obtain a mortgage on an average-priced home, known as the qualifying income.
The report from Desjardins said its affordability index climbed to 110.7 last quarter after dropping close to 100 at the end of 2007. In the early 1990s, the affordability index was as low as 93.6. Desjardins says that affordability has increased by about 10% in the past two quarters because of falling home prices and lower mortgage rates.
The Canadian Real Estate Association said last week that the average price of a home sold in the country's major markets was $327,020, a 3.6% increase from a year ago. It was the second consecutive month prices had dropped on a year-over year basis.
Statistics Canada also said last month new homes prices grew only by 3.5% in June from a year earlier. It was the slowest rate of growth since March, 2002.
Desjardins noted that in the first half of the year, existing home prices rose by 4.4% compared to 10% a year earlier. The posted rate on a one-year mortgage also fell from 7.25% in March to 6.3% by the end of June. The posted rate on a five-year mortgage fell from 7.15% to 7.1% during the same period.
"House prices are just not going up as strongly as before and in some places in Western Canada, like Calgary, we have had some price drops. With the kind of return we have in Calgary, it has a big impact on affordability," said Ms. Bégin.
Prices in Calgary fell 7.8% in July from a year earlier, according to CREA. They were off 5.8% in Edmonton during the same period. Desjardins says affordability in Calgary improved by 7.5% over the last three months.
Even with the improved conditions, affordability is still off almost 30% from the peak reached in late in 2001. Long-term Desjardins thinks affordability will continue to improve. "Prices are going to go up slowly," said Ms. Bégin. "Out west we've seen a turning point where prices are going down."
The drop in prices is good news for home builders, according to the chief operating officer of the Canadian Home Builders' Association.
"If you were sitting in my chair what you would be experiencing is one very busy housing industry from coast to coast," said John Kenward. "There has been a slowing down in certain markets and builders in those market say it's a return to a more normal market place."
Wednesday, October 22, 2008
Financial Update
TSX slides as commodities tumble, central bank warns of recession
· TSX -455.60pts (Reuters)After big gains for TSX main index on Friday and Monday, investors returned to their selling ways
· Dow -231.77pts as mixed earnings reports persuaded investors to take some profits from Monday's big runup.
· Dollar -1.38c to $82.39US skidded to its lowest close in more than 3 years versus the U.S. dollar on Tuesday as BofC cut its key overnight interest rate and suggested more rate cuts may be needed. Lower oil prices often weigh on the Canadian dollar also because Canada is a key supplier of oil to the United States.
· Oil -3.36to $70.89US per barrel. Alarmed by the rapid slide, the Organization of the Petroleum Exporting Countries, which controls 40% of the world's oil supply, is holding an extraordinary meeting Friday in Vienna. OPEC's president, Chakib Khelil, said the group is planning to announce an output reduction that analysts believe could total at least one million barrels a day
· Gold +21.50 to $766.60US per ounce
Canadian bond prices all finished higher due to a sharp selloff in equities and the likelihood of more rate cuts in Canada "Some of the optimism we had seen on Friday and Monday is perhaps reversing and so money is flowing back into bonds," said Carlos Leitao, chief economist at Laurentian Bank of Canada. "
"In normal times, when you don't have a global credit crisis, you would tend to see . . . one-month rates, two-month rates, three-month rates, six-month rates, they would all decline big time," said economist Michael Gregory of BMO Capital Markets. "These are not normal times and those rates are not reacting in the same way."
Why the Bank of Canada pulled its punch
Jacqueline Thorpe, Financial Post While all about have been losing their heads, the Bank of Canada seemed determined to keep its Tuesday.
The central bank cut its benchmark lending rate a quarter of a percentage point to 2.25%, forgoing the more forceful half-point cut many Bay Street economists had pushed for amid signs the dramatic steps it has already taken to battle the credit crisis is beginning to bear fruit.
The clearest sign yet came Tuesday when Canada's commercial banks followed the central bank's move with a cut in their prime lending rate to 4%. Prime is the benchmark for consumer and mortgage loan rates across the country but banks had previously been hesitant to follow the Bank of Canada's cuts because the global financial crisis had driven up their own borrowing rates.
"TD Canada Trust's decision to lower its prime ... reflects [Tuesday's] Bank of Canada rate change, as well as the decrease in our cost of funds due to government actions and market forces, allowing us to pass the benefits on to customers," said Tim Hockey, president and CEO of TD Canada Trust, in a statement.
To be sure, the Bank of Canada is not suddenly predicting blue skies ahead. Its statement was, in fact, downright bleak, including the bold pronouncement the United States was "already in recession" - a word U.S. Ben Bernanke, the U.S. Federal Reserve chairman, has himself yet to utter.
The global economy too appears to be heading for a "mild recession" the bank said, as it drastically slashed its outlook for Canadian growth to 0.6% this year and next from much more optimistic forecasts of 1.0% and 2.3% respectively in July.
Indeed, its list of downside risks to the Canadian economy was long: weaker global growth will reduce demand for exports; sliding commodity prices which will depress the flow of income into Canada and in turn domestic demand, while the credit crisis is bound to restrain business and housing investment.
All will lead to "sluggish" growth through the first quarter of next year, though the bank stopped short of forecasting a recession for Canada. Growth is expected to eventually pick up in 2009 and the forecast is for a 3.4% burst of speed in 2010.
Derek Holt, one of the more bearish analysts on the Street, said the statement could have been written to accompany a 75-basis-point cut, let alone the 50-basis-point cut he advocated.
"It was the dead-on right statement but the wrong headline," said Mr. Holt, who says a Canadian recession is a foregone conclusion and predicts 50 basis points of cuts next time round in December.
And yet, the bank held back its heavy fire-power.
It highlighted three reasons. First the recent sizeable depreciation of the Canadian dollar will provide an "important offset" to slower global growth and commodity prices, the bank said.
The loonie sank another US1.38¢ Tuesday to US82.39¢, bringing it down 20% from July.
Secondly, the bank pointed out it has already meted out much assistance - 2.25 percentage points of rate cuts since last December, including a half-point emergency cut in co-ordination with other central banks on Oct. 8, a move it called "extraordinary."
Other "extraordinary" measures major economies have announced to stabilize the financial system - including capital injections directly into banks in some countries - will be pivotal to resuming the flow of credit and Canada's economy and "strong" financial system will benefit directly, the bank has said.
The Bank of Canada itself has injected billions of dollars of liquidity into Canadian money markets, and is now accepting a wider array of collateral from institutions for borrowing. The government, meanwhile, has announced a plan to buy up to $25-billion in mortgages to free up space on bank balance sheets for lending.
Ottawa Tuesday informed Bay Street it would step up the plan. The government said it will buy up $7-billion in mortgages Thursday, following strong demand from banks in the first round, which saw institutions sell $5-billion in mortgage-backed securities to the government.
All these measures have eased borrowing costs considerably for Canadian banks. The rate on overnight borrowing between banks has dropped to about 2.62% from a peak in early September of 4.83%.
Bay Street is also pushing for Ottawa to guarantee new bank borrowing to help them better compete for financing with institutions from other countries that are receiving more government support.
While the message from the Bank of Canada Tuesday was be patient, it did indicate it could easily drop interest rates further if conditions warrant, saying some "further monetary stimulus will likely be required."
Close
Presented by
Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 9 December 2008.
· TSX -455.60pts (Reuters)After big gains for TSX main index on Friday and Monday, investors returned to their selling ways
· Dow -231.77pts as mixed earnings reports persuaded investors to take some profits from Monday's big runup.
· Dollar -1.38c to $82.39US skidded to its lowest close in more than 3 years versus the U.S. dollar on Tuesday as BofC cut its key overnight interest rate and suggested more rate cuts may be needed. Lower oil prices often weigh on the Canadian dollar also because Canada is a key supplier of oil to the United States.
· Oil -3.36to $70.89US per barrel. Alarmed by the rapid slide, the Organization of the Petroleum Exporting Countries, which controls 40% of the world's oil supply, is holding an extraordinary meeting Friday in Vienna. OPEC's president, Chakib Khelil, said the group is planning to announce an output reduction that analysts believe could total at least one million barrels a day
· Gold +21.50 to $766.60US per ounce
Canadian bond prices all finished higher due to a sharp selloff in equities and the likelihood of more rate cuts in Canada "Some of the optimism we had seen on Friday and Monday is perhaps reversing and so money is flowing back into bonds," said Carlos Leitao, chief economist at Laurentian Bank of Canada. "
"In normal times, when you don't have a global credit crisis, you would tend to see . . . one-month rates, two-month rates, three-month rates, six-month rates, they would all decline big time," said economist Michael Gregory of BMO Capital Markets. "These are not normal times and those rates are not reacting in the same way."
Why the Bank of Canada pulled its punch
Jacqueline Thorpe, Financial Post While all about have been losing their heads, the Bank of Canada seemed determined to keep its Tuesday.
The central bank cut its benchmark lending rate a quarter of a percentage point to 2.25%, forgoing the more forceful half-point cut many Bay Street economists had pushed for amid signs the dramatic steps it has already taken to battle the credit crisis is beginning to bear fruit.
The clearest sign yet came Tuesday when Canada's commercial banks followed the central bank's move with a cut in their prime lending rate to 4%. Prime is the benchmark for consumer and mortgage loan rates across the country but banks had previously been hesitant to follow the Bank of Canada's cuts because the global financial crisis had driven up their own borrowing rates.
"TD Canada Trust's decision to lower its prime ... reflects [Tuesday's] Bank of Canada rate change, as well as the decrease in our cost of funds due to government actions and market forces, allowing us to pass the benefits on to customers," said Tim Hockey, president and CEO of TD Canada Trust, in a statement.
To be sure, the Bank of Canada is not suddenly predicting blue skies ahead. Its statement was, in fact, downright bleak, including the bold pronouncement the United States was "already in recession" - a word U.S. Ben Bernanke, the U.S. Federal Reserve chairman, has himself yet to utter.
The global economy too appears to be heading for a "mild recession" the bank said, as it drastically slashed its outlook for Canadian growth to 0.6% this year and next from much more optimistic forecasts of 1.0% and 2.3% respectively in July.
Indeed, its list of downside risks to the Canadian economy was long: weaker global growth will reduce demand for exports; sliding commodity prices which will depress the flow of income into Canada and in turn domestic demand, while the credit crisis is bound to restrain business and housing investment.
All will lead to "sluggish" growth through the first quarter of next year, though the bank stopped short of forecasting a recession for Canada. Growth is expected to eventually pick up in 2009 and the forecast is for a 3.4% burst of speed in 2010.
Derek Holt, one of the more bearish analysts on the Street, said the statement could have been written to accompany a 75-basis-point cut, let alone the 50-basis-point cut he advocated.
"It was the dead-on right statement but the wrong headline," said Mr. Holt, who says a Canadian recession is a foregone conclusion and predicts 50 basis points of cuts next time round in December.
And yet, the bank held back its heavy fire-power.
It highlighted three reasons. First the recent sizeable depreciation of the Canadian dollar will provide an "important offset" to slower global growth and commodity prices, the bank said.
The loonie sank another US1.38¢ Tuesday to US82.39¢, bringing it down 20% from July.
Secondly, the bank pointed out it has already meted out much assistance - 2.25 percentage points of rate cuts since last December, including a half-point emergency cut in co-ordination with other central banks on Oct. 8, a move it called "extraordinary."
Other "extraordinary" measures major economies have announced to stabilize the financial system - including capital injections directly into banks in some countries - will be pivotal to resuming the flow of credit and Canada's economy and "strong" financial system will benefit directly, the bank has said.
The Bank of Canada itself has injected billions of dollars of liquidity into Canadian money markets, and is now accepting a wider array of collateral from institutions for borrowing. The government, meanwhile, has announced a plan to buy up to $25-billion in mortgages to free up space on bank balance sheets for lending.
Ottawa Tuesday informed Bay Street it would step up the plan. The government said it will buy up $7-billion in mortgages Thursday, following strong demand from banks in the first round, which saw institutions sell $5-billion in mortgage-backed securities to the government.
All these measures have eased borrowing costs considerably for Canadian banks. The rate on overnight borrowing between banks has dropped to about 2.62% from a peak in early September of 4.83%.
Bay Street is also pushing for Ottawa to guarantee new bank borrowing to help them better compete for financing with institutions from other countries that are receiving more government support.
While the message from the Bank of Canada Tuesday was be patient, it did indicate it could easily drop interest rates further if conditions warrant, saying some "further monetary stimulus will likely be required."
Close
Presented by
Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 9 December 2008.
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