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Are markets counting too much on Fed QE3? Add to ...

These are stories Report on Business is following Wednesday, June 6, 2012.

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Markets rally on stimulus hopes
Are investors counting too much on more juice from the world's central banks?

European Central Bank chief Mario Draghi let the markets down today by failing to budge on interest rates. That followed no major hint of change at the Bank of Canada yesterday.

Now, investors are waiting to see what Federal Reserve chairman Ben Bernanke has to say tomorrow during his congressional testimony. In particular, they're looking for hints that the U.S. central bank may be poised for a third round of quantitative easing, or QE3, as it has been dubbed.

"In the battle of the central banks, it is abundantly clear that the Fed trumps the ECB," said sales trader Ben Critchley of IG Index in London.

"There was a brief wobble for markets during the early afternoon after Mr. Draghi said no to any rate cut for the euro zone," Mr. Critchley said in a research note.

"However, indices rapidly stabilized after they remembered the more important rumour, that QE3 might finally be on its way in the U.S. The ECB didn’t hint at any liquidity boosts so all eyes now turn to Washington. Both the Fed’s vice-chairman and chairman will make speeches over the next 24 hours, and, so the theory goes, the spate of weaker U.S. data means that intervention must be on its way. Markets might of course be setting themselves up for a fall in the coming days if we don’t get  any supportive words, but for now the optimists are in full control."

According to a report in The Wall Street Journal today, weaker numbers of late have the Fed thinking again about new measures. Does that mean QE3 is necessarily on the way? Not necessarily, observers say, and the Fed has said all along that it will act if needed.

"The general line of argument that the Fed might contemplate further monetary policy action if U.S. economic data - and particularly employment data – were to weaken is one that we have emphasized over the past five months," said Derek Holt and Dov Zigler of Scotia Capital.

But, they added, "this is not a signal that QE3 is a sure thing, but rather, that weakness in U.S. economic data bears watching."

The Bank of England also meets tomorrow.

“The risk is that while the key decisions are pushed out to the next G20 meeting in two weeks’ time, this runs too close to the Greek election results, making it a ‘do or die’ juncture,” she added.

 

Do or die?
Group of 7 finance officials talked yesterday in an emergency session - and did nothing - and observers today say they are fast approaching a “do or die” moment.

That’s because while they know something has to be done fast, decisions that could be made won’t come until a G20 meeting in two weeks, at the earliest, which comes dangerously close to the mid-June election in Greece.

After the last Greek vote left no party able to form a coalition government, the coming election may well determine whether Athens stays in the euro zone, and whether it defaults.

“There was some vague hope of co-ordinated policy action over the weekend, hope on the back of yesterday’s G7 teleconference, and nothing at all came of it,” said senior currency strategist of Elsa Lignos of RBC in London, where markets are back up and running after a four-day weekend.

As Eric Reguly and Bill Curry write in today’s Globe and Mail, G7 officials know something must be done, as does everyone else, as Europe struggles through its crisis with concern mounting daily.

“It was interesting that a potential ‘policy response’ was being considered, including Europe’s progress toward ‘financial and fiscal union,’” senior economist Jennifer Lee of BMO Nesbitt Burns said of the teleconference.“So as the European debt crisis drags on, it is, I suppose, comforting to know that the leaders are worried enough to hold a conference call and that some progress is being made toward a fiscal union.”It’s not that simply talking, as the G7 officials did yesterday, isn’t important. But markets have lost faith in Europe’s leaders, in particular, and it’s going to take action to change sentiment.

“Discussion of concerns is one step towards acknowledging that a solution has to be found and ultimately agreements are required to stabilize what is increasingly becoming an untenable situation,” said Lauren Rosborough of Société Générale.

“The risk is that while the key decisions are pushed out to the next G20 meeting in two weeks’ time, this runs too close to the Greek election results, making it a ‘do or die’ juncture,” she added.

Reports today suggest that, while Spain hasn't asked for a bailout of its banks, Europeans are preparing one regardless.

 

Barrick changes chiefs
Troubled by its lacklustre share price, Barrick Gold Corp. has switched chief executive officers, promoting its chief financial officer to the role.

Jamie Sokalsky replaces Aaron Regent. He's also replacing Mr. Regent on the gold miner's board.

Barrick also named a new co-chairman, John Thornton, currently a Barrick director.

“On behalf of our Board, I would like to thank Aaron for his significant contribution to Barrick’s development," said chairman Peter Munk. "We are fully committed to maximizing shareholder value, but have been disappointed with our share price performance. Our board has every confidence in Jamie’s experience and commitment to take our company forward."

Mr. Sokalsky said in a statement that his focus will be on "maximizing shareholder value and our mission of superior performance."

 

Regulator eases rules
Canada’s banking regulator has taken a softer stance than the industry feared on new mortgage underwriting rules that it will be putting into effect, The Globe and Mail's Tara Perkins writes.

One of the most significant changes from the proposals it originally issued in March is that it has backed off a rule that would have forced banks to put borrowers through a thorough requalification process when mortgages come up for renewal.

The country’s mortgage brokers feared such a rule would have caused many people to lose their homes.

 

AGF sells trust arm
AGF Management Ltd. has struck a $415-million cash deal to sell its trust arm to Laurentian Bank in order to focus on its global investment management business, The Globe and Mail's Shirley Won reports.

AGF Trust, which provides everything from GICs and term deposits to investment loans, will be integrated in Laurentian Bank’s B2B Trust subsidiary.

"We have built AGF Trust into a very successful business, and selling now will allow us to focus our resources on the highest potential opportunities for our company," AGF chief executive officer Blake Goldring said today.

 

Canadians and debt
A new study today suggests a majority of Canadians expect to be debt-free within five years.

"While Canadians have taken on more debt in the past five years, the majority expect to pay it off in the same amount of time," says the report by Bank of Montreal, citing the 54 per cent of those with debt as believing they'll pay it off within that time frame.

The survey done by Leger Marketing found that average household debt, including mortgages, credit cards, etc., tops $112,000.

The average monthly payment on those debts is almost $1.140.

And while one-quarter of Canadians are debt free, 41 per cent say they've loaded on more debt over the past several years because they're spending more.

 

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