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Euro fiscal pact 'a smoking ruin,' global markets tumble Add to ...

These are stories Report on Business is following Monday, April 23, 2012. Get the top business stories through the day on BlackBerry or iPhone by our mobile-friendly webpage.

Euro crisis flares The euro zone debt crisis is flaring up again, which, coupled with economic news from China, has put global markets into a deep funk today.

Not that it ever went away, but there are developments across the 17-member monetary union that highlights the severity of the troubles in Europe and why they refuse to die.

Weighing on markets are political issues in France and the Netherlands, and debt and manufacturing debt in the euro zone. Manufacturing numbers from China have also added to the troubles.

"Political disarray and discord in the peripheral countries has been pretty much par for the course over the past few months, and have certainly made life difficult enough for European policy makers to contend with," said senior market analyst Michael Hewson of CMC Markets in London.

"This disarray and discord, it would appear, is now spreading to the triple-A core and is bound to add an element of even more uncertainty to any coherent political response to tackle the European sovereign debt crisis over the coming weeks."

Playing out in the euro zone today:

  • François Hollande, who opposes the severity of France's austerity measures and wants to renegotiate a euro-wide fiscal agreement, took the first round in the French elections, edging out Nicolas Sarkozy, with a strong showing for the anti-euro forces. They now head toward a second round on May 6.
  • The Dutch government collapsed over budget issues.
  • Fresh data showed showed euro zone budget deficits narrowing, but overall debt levels climbing as a percentage of economic output.
  • Spain's central bank confirmed the obvious, that the country is now back in recession.
  • Consumer confidence in Italy has fallen to its lowest level in some 15 years.

"Expect to see the usual headline, ‘billions wiped off shares,’ in the morning, after a bout of heavy selling today caused by a barrage of worrying news from the euro zone

"One potential change of government in the euro zone is bad enough, but with the Dutch government falling apart as well, investors have been well and truly spooked. Added to this, German manufacturing data this morning registered an expected drop for April, raising the worry of a slowdown in Europe’s hitherto impregnable economy."

Markets will not look fondly on the fraying of the euro zone's commitment to tackle their budget troubles, which, of course, are exacerbated by austerity measures that pinch the economy.

"The prospect of the collapse of the Dutch government over budget cuts demanded by the EU in line with the terms of fiscal compact agreed at the end of last year has created severe political uncertainty within a key ally of the German led approach to austerity," said Mr. Hewson.

"Of more importance is the fact that yet another country is liable to renege on its budget targets, following Spain and Italy last week and as such leave the much vaunted fiscal compact, which was agreed in December, in a smoking ruin," Mr. Hewson added in a research note.

"A failure by Dutch politicians to come to an agreement is likely to lead to a call for elections, probably as soon as September in what is likely to turned into a vote of confidence in the euro itself. If that wasn’t enough weekend events in France and the likelihood of a Francois Hollande win over President Sarkozy in the coming weeks is likely to undermine the fiscal compact even more, given the formers pledge to renegotiate it if elected."

Tokyo's Nikkei slipped 0.2 per cent today, and Hong Kong's Hang Seng 1.8 per cent. In Europe, major markets sank by up to more than 3 per cent. The gloom then spread into North America, where Toronto's S&P/TSX composite , the S&P 500 and the Dow Jones industrial average all sank.

The "flight from risk" is playing out across all financial markets today, hitting bonds and commodities.

"The [U.S. dollar]index strengthened in overnight trading, while the [euro zone]gave up much of Friday’s gain," said Carl Campus of BMO Nesbitt Burns.

"Spain 10-year yields continue to flirt with 6 per cent, up 2 basis points overnight, while Italy 10-years rose 5 basis points, bringing them to 5.7 per cent," he added.

"... Commodity prices are broadly weaker with WTI crude down 0.7 per cent to $103/barrel, gold down 0.6 per cent to $1633/ounce and copper falling 1.8 per cent."

China numbers weigh An April reading on manufacturing in China actually showed a small improvement, but still highlighted that the country's factory sector is contracting.

A final reading of purchasing managers index showed it rising to 49.1 from 48.3. But 50 is the mark that separates contraction from expansion.

"China’s flash manufacturing PMI for April rose, but the small increase will have disappointed anyone hoping for a clear signal that the economy is bottoming out," said Qinwei Wang, China economist for Capital Economics.

Nestlé strikes deal The business of babies is in the news today.

Pfizer Inc. announced the $11.9-billion (U.S.) sale of its infant nutrition unit to Nestlé SA, which will give the latter a leg up in China.

And closer to home, Amazon.com Inc. launched its new Canadian baby store.

Carney still subject of speculation I don't think the speculation over Mark Carney and the Bank of England is going away any time soon.

It began a week ago when the Financial Times reported that the Bank of Canada governor had been approached informally by a member of the Bank of England's court about the possibility of taking over from his British counterpart when the latter retires.

Mr. Carney dismissed the report as inaccurate, but that seems to have accomplished little.

The way the Financial Times now puts it is that Mr. Carney has disputed he had direct contact with the Bank of England, but that "no one has disputed the existence of an approach per se, now believed to have come through a third party."

This is certain to gain speed this week as British politicians push for change at the central bank. While Mr. Carney isn't a front runner, even if he were in the running officially, he is an attractive candidate given his global reputation.

What to watch for this week The Federal Reserve is scheduled to meet, with a policy statement Wednesday followed by a news conference with Chairman Ben Bernanke. But don't expect too much. The U.S. central bank, which has been holding back on further stimulus, has said the economy is growing at a modest pace, but that the jobs market remains a real trouble spot. It's likely to hold to that line next week.

"The minutes from the last meeting revealed little appetite among Fed officials for a new round of asset purchases," said Paul Dales of Capital Economics.

"The weaker-than-expected non-farm payroll figures in March won’t have dramatically changed that assessment. The Fed’s best option is to stay on the sidelines waiting to see which way the recovery breaks."

A couple of days later, on Friday, markets will get a picture of how the U.S. economy fared in the first quarter. It's believed to have grown at an annual pace of 2.2 per cent to 2.5 per cent, marking the 11th quarter in a row of expansion.

"It’s been a rocky quarter, but we expect that the economy continued to grow at the start of 2012, but at a slower pace," said senior economist Jennifer Lee of BMO Nesbitt Burns.

"A stronger job market helped keep consumer spending steady, even in the face of high gasoline prices," she added. "Slowly improving housing activity and net exports also contributed to growth, while spending cuts at all levels of government held the public sector back."

In Canada, we'll get a sense of how the country's retailers fared in February, with a Statistics Canada report tomorrow morning. Economists expect to see an increase of up to 0.7 per cent, but a weaker number when autos are factored out.

"Retailers got off to a mixed start in 2012, with the month’s weak underlying retail sales momentum paired with a robust boost in auto sales," said Emanuella Enenajor of CIBC World Markets.

"An easing in model shortages in January saw consumers head to dealer lots in droves that month, but with that temporary factor out of the way, we don’t expect an extended bout of buying in February."

In the markets, earnings season kicks into much higher gear, with quarterly reports from the likes of Canadian National Railway, Rogers Communications, Teck Resources, Cenovus Energy, Encana, Goldcorp, Nexen, Imperial Oil, Potash Corp., Precision Drilling, Shoppers Drug Mart, TransAlta and TransCanada.

Major U.S. companies reporting include Apple Inc., AT&T Inc., Boeing Co., Caterpillar Inc., Amazon.com and Chevron Corp.

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