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Dollar sinks, stocks roiled Investors are in a foul mood again today as fears that Greece will default roil stock and currency markets.
"Ongoing worries about Europe, talk of a bigger haircut on Greek debt (probably inevitable), Goldman Sachs calling for recession in Europe, and a brewing U.S.-China trade war are all weighing on markets," said Benjamin Reitzes of BMO Nesbitt Burns. "Also, Deutsche Bank said that it will not hit its 2011 profit target … but that shouldn’t come as a surprise."
Stocks first tumbled in Asia and then in Europe, followed by the Dow Jones industrial average , the S&P 500 and Toronto's benchmark S&P/TSX composite in North America.
The Canadian dollar sank below 95 cents (U.S.), dipping as low as 94.02 cents, while oil prices fell and gold rose.
Playing most into the market fears are concerns that Greece is headed for a default. It has already missed its deficit targets for 2011 and 2012 and sees a continuing recession, while leaders of the euro zone have been unable to persuade investors they have the situation in hand. Fears are pressuring bank shares.
Where the loonie is concerned, a rising U.S. dollar, lower commodity prices and general angst are all ganging up to push the currency lower, said George Davis, the chief technical analyst at RBC Dominion Securities.
There are, however, "resistance levels" at which he'd expect traders to buy the Canadian dollar, and they're well below parity, first at 93.84 cents and then at 92.14 cents.
He also cited a "very high correlation" between the S&P 500 and the loonie. When the S&P sells off, as it did yesterday, so goes the Canadian dollar.
Chief currency strategist Camilla Sutton of Scotia Capital said the loonie could sink as low as 92 cents before the week is out, and then 90 cents becomes a psychological level.
"We're in an environment of extreme risk aversion," Ms. Sutton said, adding she expects short-term pressure on the currency but somewhat of a rebound heading toward the end of the year.
In a worst-case scenario, the currency could mimic the level of descent in 2008, when it slumped from a close of 95.64 cents Sept. 29 to 76.82 in just over a month, though Ms. Sutton doesn't expect that to happen this time.
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Over the rainbow The finance ministers of the embattled euro zone have put off an €8-billion bailout payment to Greece until mid-November as they review an agreement they made in July with debt holders, taking the situation right down to the wire and threatening to upset markets even further.
But that's okay, according to Greece's Finance Minister Evangelos Venizelos, who said today Greece can make it through until then. I feel so much better.
It's looking more and more like private debt holders will be taking a bigger hit than the 21-per-cent they agreed to in July because, according to the chief of the 17-member monetary union, the finance ministers are looking again at whether they should share more of the pain. Thus, they delayed their meeting originally scheduled for mid-October.
"This was somewhat of a surprise given that markets had been led to believe that Greece would run out of money on the 14th October," said CMC Markets analyst Michael Hewson.
"It was also hinted that Europe may have to revisit the details of the debt exchange program which currently stands at 21 per cent."
To borrow from The Wizard of Oz, what Europe needs is a brain, a heart and some nerve. The analogy's not a bad one given that leaders of the euro zone have been living in a land of make believe for about two years now, seemingly unable to come to grips with the reality of the situation.
A brain: Europe has many great economic and financial minds, but they need to think as one. The region is divided by competing interests, which shouldn't be a surprise, politics and an absolute lack of unity. Obviously, what's best for Greece might not be best for Germany, but this is a group that is long past the need to think and solve together.
"As Eurolanders fail to achieve a common voice to address their own problems, wealth is being destroyed around the world," said Carl Weinberg, chief economist at High Frequency Economics.
A heart: The answer in many parts of the monetary union has been to slash and burn, throwing people out of work, raising taxes and capping pay levels. The Greek government, for example, is ripping the heart out of the Greek people. Just yesterday, it warned of a longer recession, amid a jobless rate already at 16 per cent. Athens is so intent on meeting what have shown to be unrealistic targets that it is ignoring the suffering of its people. Obviously, it needs to slash its debt, but it needs to do so in a way that doesn't promise to cripple its economy for years to come. You simply can't have such austerity levels without ensuring a stalled economy and ongoing grief.
"I’ve given up planning for the future," Amalia Dougia, a single mother who has been out of work for two years, told Reuters. "I just accept life as it comes. I’ve thought about suicide, but I have to look after my children.”
The nerve: For months now, leaders of the euro zone have lacked the nerve, and the ability, to act forcefully to contain the debt crisis. They've thrown good money after bad and, time and time again, simply kicked the can down the road. What's needed now - even though the euro zone says it's not on the table - is a managed bankruptcy that will give investors some certainty and allow Athens to find some stability.
"While everyone denies that a Greek default is possible, Greece is moving closer to running out of cash every day," said Mr. Weinberg. "No one can agree on a way to get cash to Greece, and no one seems to understand that a default will be postponed by only a few months if Greece gets more cash now. There is nothing anyone can do to stop it."
- Despair and resignation in Greece as more pain looms
- Today's key developments in Europe's debt crisis
In the eye of the storm European banks are in the eye of this particular storm because of credit risks, notably the France-Belgium banking group Dexia, whose shares plunged today, forcing governments to promise to back up the institution.
“We are going to take action concerning our banks, and the decision taken so far is to act with a guarantee,” said Belgium's Finance Minister Didier Reynders.
While the governments promised action, Reuters quoted sources as saying the most likely solution will be to break the bank into two, with its troubled operations put into a so-called bad bank and its stronger units sold.
Deutsche Bank hit Germany's giant Deutsche Bank issued a profit warning today and unveiled plans to slash 500 jobs. It also said in a statement that it would take impairment charges related to Greek debth of about €250-million.
"The intensifying European sovereign debt crisis led to sustained uncertainties among market participants in the third quarter and thus to significantly reduced volumes and revenues in particular the corporate banking and securities (CB&S) corporate division," the bank said.
"... The bank expects that against this background as well as ongoing market turbulence the planned pre-tax target of €10-billion from its core businesses is no longer achievable for 2011."
It said, however, it still expects a third-quarter profit and "a robus earnings level" for the year.
Central bankers press governments Two of the world's top central bankers warned their governments today there's only so much they can do.
The comments came from Federal Reserve Chairman Ben Bernanke, in testimony to the Joint Economic Committee in Washington, and European Central Bank chief Jean-Claude Trichet, speaking to the European Parliament.
"Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy," said Mr. Bernanke.
"Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close co-operation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies - pertaining to labour markets, housing, trade, taxation, and regulation, for example - also have important roles to play."
Mr. Trichet, in turn, said the ECB can take action "but under no circumstances can we replace governments." He added that "to be in denial that we are in the worst crisis since World War II that would be the most terrible mistake you could make.”
U.S.-China tensions escalate Trade tensions between the United States and China are heating up in the wake of a U.S. Senate vote yesterday to debate a bill aimed at countries that hold their currencies at low levels. That means China. If it all came to pass, the U.S. government could punish such nations with duties.
Chinese officials hit back today, warning such a move could only hurt. And it didn't sugar coat the warning of a trade war.
"In the context of a sluggish global economy and weak confidence, an external environment where all countries work together to tide over difficulties through concerted efforts is of critical importance," the People's Bank of China said.
"At this juncture, the vote by the U.S. Senate cannot help address the problems of insufficient savings, trade deficit or high unemployment in the U.S.; on the contrary, it might seriously affect the progress of China's reform of the exchange rate regime and might also result in a trade war that no one would like to see," the central bank said in a statement posted on its website.
"From the perspective of the U.S. experiences, politicizing economic issues does not help solve the problems per se, but would rather complicate the problems, and adversely impact economic recovery and market confidence."
Awaiting the iPhone The world's most popular smart phone gets a makeover today, and so does the company that designed it, The Globe and Mail's Omar El Akkad writes.
Apple is expected to unveil the new iteration of the iPhone at an event in California. Like its predecessor, the iPhone 5 will be the centre of the technology world's attention for the foreseeable future – indeed, most tech blogs have been full of speculation for weeks about what features the new phone will come with.
The company is expected to take what is already a blockbuster product and make it a little slimmer, a little faster and a little more versatile. Perhaps the most groundbreaking new feature expected in the new iPhone is a more robust set of voice-powered controls.
Law firms in merger deal International law firm Norton Rose is merging with Calgary based firm Macleod Dixon, effective next January.
The firm will be called Norton Rose Canada, with close to 700 lawyers based in Calgary, Montreal, Ottawa, Toronto, Québec, Caracas and Bogotá, The Globe and Mail's Jacquie McNish and Jeff Gray report.
Norton Rose Canada will be ranked among the top three largest Canadian legal practices. Norton Rose a global law firm that earlier this year merged with Montreal's historic law firm Oglivy Renault LLP.
Headlines of note
In Economy Lab Now that Ontario has smart meters, the policy challenge is: how can we use them to generate benefits for the average Ontario electricity consumer? Frances Woolley examines the issue.
In International Business Denmark’s new centre-left government has opted to spend and work its way out of the economic crisis in sharp contrast to the austerity models that have emerged in many other European countries, Clare MacCarthy of The Financial Times reports.
In Globe Careers Managers must be careful not to encourage the wrong sort of rivalry and they need to pick their moment to take spats public, Andrew Hill of The Financial Times writes.
From today's Report on Business
- On an even keel, Manitoba's miracle takes shape
- Canadians unfazed by pension funding woes
- Carney touted for top global banking job
- David Milstead's Vox: HP stock is cheap, but not cheap enough
- Dow Jones Industrials19,804.72-22.05(-0.11%)
- S&P 500 INDEX2,271.89+4.00(+0.18%)
- S&P/TSX Composite15,397.85-43.51(-0.28%)
- Crude Oil Front Month Futures$51.54+0.46(+0.90%)
- Gold Front Month Futures$1,198.60-12.70(-1.05%)
- Deutsche Bank AG$18.740.00(0.00%)
- Updated January 18 4:01 PM EST. Delayed by at least 15 minutes.