These are some of the major stories Report on Business followed this week. Get the top business stories on weekdays on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.
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Banks under scrutiny
Though they may be the envy of their peers because of how they came through the crisis, Canada's banks are nonetheless coming under increasing scrutiny amid a push by global regulators to keep tabs on the world's financial institutions.
The U.S. Federal Reserve announced this week that it's beefing up its stress testing for America's major banks, taking in those that have more than $50-billion (U.S.) in assets and making the readings an annual event. The banks will have to test their soundness under extreme scenarios.
"On the one hand, this move is an attempt to instill market confidence in the sense that the Feds are 'on it,'" said Mark Chandler and Ian Pollick of RBC Dominion Securities. "But, quite perversely, the complete opposite interpretation is garnering steam owning to the fact that if they are modelling the tests at such extreme scenarios, is there something building beneath the surface that the market has not yet grasped onto? Unlikely, but something to think about nonetheless."
As The Globe and Mail's Grant Robertson reported this week, that will put the U.S. operations of Royal Bank of Canada and Bank of Montreal under the Fed's microscope. Toronto-Dominion Bank, a major player in the U.S., isn't subject to the tests because it operates under older laws, though that should change in 2015.
Canada's banking system is strong, and the capital levels of the institutions high. Still, as we've seen, banks around the world are being monitored closely, particularly given the crisis in the euro zone.
"We think this event highlights the fact that the regulatory complexity of owning and managing a geographically diversified portfolio of local banking franchises will increase markedly over the next several years," said analyst Peter Routledge of National Bank financial. "In the future, Canadian bank boards will have to take heed of a broader array of capital requirements before finalizing dividend and capital policies. This, in turn, will heighten regulatory risk for Canadian bank shareholders."
No sooner had the Federal Reserve acted than Finance Minister Jim Flaherty also moved to monitor developments more closely.
Under the Financial System Review Act, which was introduced in the Senate, Mr. Flaherty will take on new powers to say no to foreign takeovers by Canada's banks, The Globe and Mail's Bill Curry and Tara Perkins reported.
Crisis deepens
The euro crisis began with Greece protesting that it didn't need a bailout. Now, the very survival of the monetary union as a group is in question.
"Unless something truly radical happens, this could be a train wreck," analyst Michael Hewson of CMC Markets told me on Friday, the last day of yet another bruising week for the embattled governments of the 17-nation euro zone.
As it has almost every week for the past two years, the crisis deepened as borrowing costs surged again amid a couple of more ratings downgrades. Friday saw a weak debt auction by Italy, but, more important, the crisis struck at the very heart of the union earlier in the week as a German bund auction failed.
Many observers believe the only answer for the region is to spark the European Central Bank into aggressive action, with large-scale bond buying and making the ECB the lender of last resort to ailing governments. They would also like to see an agreement to issue eurobonds, as the EU proposed this week. But Germany's Angela Merkel is firmly against such moves, which, at this point anyway, makes such measures unlikely.
Ms. Merkel met in Strasbourg Thursday with France's Nicolas Sarkozy and Italy's new Prime Minister, Mario Monti, but, aside from proposing vague treaty changes, they proposed nothing substantial. Of course, going forward, Ms. Merkel faces her own not inconsiderable issues.
"Germany’s principal concern should be that it very much risks being the next shoe to drop into next year," said Derek Holt and Karen Cordes Woods of Scotia Capital.
"Massive German refinancing in 2012 and beyond, the fact that a eurobond issue would crush bunds through converging yields across peripheral economies and bund yields inward upon each other, and slow growth that will result in deteriorating sovereign finances next year will all risk an inward shift by voters in the lead-up to Merkel’s 2013 re-election bid that could challenge Germany’s willingness and ability to backstop further euro zone initiatives. The threat that the crisis is more aggressively migrating into the core economies is real."
We'll see what next week brings, given Italian government auctions Monday and Tuesday, and a Spanish debt sale on Thursday.
"With Germany having ruled out eurobonds and an active role for the ECB, there is still no end in sight for the debt crisis," said Chris Beauchamp of IG Index in London.
The troubles in the euro zone, sparking fears of a banking crisis, come amid signs that Europe is poised to plunge back into recession, if it's not already there. There were more signs of that this week in the release of economic indicators. So when will Ms. Merkel bend, if at all?
"It’s going to take more definitive signs of recession to bring two key German parties on board with more drastic action to salvage the euro: the Bundesbank, and the German public writ large," said chief economist Avery Shenfeld of CIBC World Markets. "With Germany likely to join others in recession by [the first quarter], both Bundesbank and public objections to more radical action should begin to fade. Euro overnight rates will then be at their zero bound, making quantitative easing a policy necessity, and providing political cover for more aggressive periphery-country bond purchases."
Ottawa weighs telecom move
If it seems that the landscape of Canada's telecommunications industry is constantly changing, that's because it is.
Having opened up the sector to upstarts, the federal government is now studying the possibility of allowing those smaller players to tap foreign money or be acquired by global players with heft. Smaller companies such as Wind Mobile and Mobilicity have driven down prices, but the industry remains dominated by the major incumbents.
As it now stands, foreign investment, both direct and indirect, cannot, combined, top 46.7 per cent.
As The Globe and Mail's Steven Chase, Iain Marlow and Rita Trichur reported this week, the study of a plan to let non-Canadians own 100 per cent of companies with a market share of 10 per cent or less has upset at least one of the major players, Rogers Communications Inc.
Ken Engelhart, senior vice-president for regulatory affairs at Rogers, the country's biggest wireless company, said his firm isn't opposed to changing the rules, but they have to apply across the board, which would take in not only Rogers but also BCE Inc. and Telus Corp.
"The government shouldn’t be trying to jig the game by manipulating the rules," he said. "They should have an even set of rules that affect all players in the same fashion."
Whither Canada's housing market
Most Canadian economists believe the housing market is going to slow further, but they don't envision a U.S.-style bust. The Economist magazine, however, appears somewhat more worried.
The magazine's new study of global housing markets, released this week, warns that real estate in Canada and a few other countries appears frothy.
While prices have dropped in half of the 16 countries measured, they're high in many others. The study looks at the price-to-income ratio, which measures affordability, and a price-to-rent measure.
According to the magazine's average of the two, homes are overvalued by 25 per cent or more in Canada, Australia, Belgium, France, New Zealand, Britain, the Netherlands, Sweden and Spain. And for those first four, it said, housing "looks more overvalued than it was in America at the peak of its bubble."
The Economist gave a nod to the fact that some other observers dismiss its findings on the basis that lower interest rates can justify higher prices because they allow home buyers to borrow more. The magazine, though, points out that rates will not always be at their emergency low levels.
Royal Bank of Canada said in a study Friday that housing affordability in Canada improved "modestly" in the third quarter of the year, helped along by these low rates. Having said that, according to chief economist Craig Wright, Vancouver's still a trouble spot.
“Housing affordability levels are quite good in most parts of Canada and will pose little threat to overall housing demand,” he said. “The Vancouver area market continues to be a major exception, with sky-high property values in upscale neighbourhoods making it both extremely unaffordable and the most at risk of a downward correction.”
In the markets
The S&P 500 slid 4.7 per cent this week, and Toronto's S&P/TSX composite 3.6 per cent, dogged by everything from the euro zone to economic numbers from China and the United States.
Next week brings the focus of investors to Canadian banks, several of which report fourth-quarter results.
"With that, equity markets stumble their way into December," said Robert Kavcic of BMO Nesbitt Burns. "The final month of the year has been the strongest on the calendar during the post-war era, with the S&P 500 posting an average monthly gain of 1.7 per cent. In fact, the index has registered December gains in four of the past five years, including 2008 as the financial crisis was reaching climactic heights."
Required reading this week
The relentless rise of unemployment in many of the world’s developed nations threatens a “lost decade” that will sap consumer confidence, squeeze government revenues and alter migration patterns, Tavia Grant writes.
Alberta expects another record year for oil and gas land sales, as companies deploying new extraction technologies flock to previously overlooked energy plays. Carrie Tait reports from Calgary.
Britain is fully integrated into the European economy and suddenly finds itself sinking as some of its biggest trading partners, from Ireland to Italy, succumb to pressures of excess debt, ailing banks and rising unemployment. Eric Reguly reports from London.
In a pursuit to reinvent the book store in a digital age, Indigo Books & Music Inc.will in January start returning unsold books to publishers after just 45 days if the products are gathering dust on store shelves. Currently, the retailer waits 75 days to begin shipping back unsold books to publishers. Marina Strauss reports.
Ian Delaney, the “Smiling Barracuda” of Bay Street who transformed Sherritt International Corp. into a multifaceted mining company with reaches into Cuba and Madagascar, is stepping down, again, as its CEO, Brenda Bouw writes.
What to watch for next week
We'll get a sense of the state of the Canadian recovery when Statistics Canada reports Wednesday on how the economy performed in the third quarter and then releases its key jobs reading for November on Friday.
Economists expect to see that the economy rebounded in the third quarter, by about 3 per cent annualized, after stalling in the second. Still, the outlook is dimmer.
"Looking forward, economic momentum is likely to cool as headwinds facing Canadian households grow stronger," said economist Diana Petramala of Toronto-Dominion Bank. "An unsatisfactory pace of job growth - zero net gains in employment since July - in combination with poor consumer confidence and ongoing losses in equity markets are expected to slow the pace of spending growth over the next few quarters."
The employment report, in turn, isn't expected to be as bad as the one for October, when the country lost 54,000 jobs. But the jobless rate isn't expected to come down either.
Economists expect to see job creation of anywhere from 5,000 to 25,000, with the unemployment rate remaining at 7.3 per cent or perhaps ticking up to 7.4 per cent.
"With external uncertainties cited as the main reasons for a more constrained business outlook (as cited in the Bank of Canada’s Business Outlook Survey) the pace of domestic hiring could continue to suffer from dampened expectations for U.S. demand, and the slings and arrows of an escalating euro zone crisis," said Emanuella Enenajor of CIBC World Markets.
Markets will be far more focused on the U.S. jobs report, also on Friday, given the crisis in the U.S. labour market after the recession that threw millions out of work. But there, economists expect to see that about 100,000 jobs or more were gained in November, with, as Sal Guatieri of BMO Nesbitt Burns put it, "companies likely inspired by the recent modest upturn in consumer spending." The unemployment rate is projected to remain around 9 per cent.
There are some key earnings next week, as well, as the major banks begin reporting fourth-quarter results. Among them are Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Royal Bank of Canada.
"We forecast provisions for credit losses to remain stable with risks increasing, while we expect capital markets to remain depressed in the immediate period, with risks tilted to the downside," said UBS Securities Canada.
Bombardier Inc. also reports third-quarter earning.
Seven things
1. “Between now and 2025, agricultural production in the Netherlands will run into environmental limits, particularly for the disposal of manure." So says a study published this week by Wageningen University and Research's LEI, and reported by Bloomberg News. As if the euro zone doesn't have enough s*** to deal with.
2. It's not often that you get to make a true "how-many-whoevers-does-it-take-to-change-a-lightbulb" joke. But The Canadian Press reports on access-to-information documents that show it cost the government a full $500 to move a light fixture from a room at Muskoka's Deerhurst Resort for the G8 summit. "The work order actually entailed an electrician, an apprentice/assistant and a carpenter for disassembly and relocation of the large boardroom table," said a spokeswoman for Skyline Hotels.
3. Mandatory resident tuition and campus fees for more than six units run up to almost $3,300 (U.S.) at Sacramento State U. There are also late registration fees, re-enrolment fees, and the cost of student professional liability insurance. There's also a $20 fee for bouncing a cheque. But here's one "fee" psych 101 students don't have to pay any longer: Snacks to attend Professor George Parrott's class. The Sacramento Bee reports that the professor has been demanding snacks from his kids for at least 39 years, but members of the psych department at California State University, Sacramento, decided he shouldn't have walked out of class two weeks ago because there weren't enough. The professor says it's his way of encouraging the kids to work together.
4. A study by two Canadians published in the journal Aggressive Behavior looks at how women aggressively compete with each other for the attention of men. It's not just on TV shows like The Bachelor, they find, but plays out also in areas like offices and schools. The study by Tracy Vaillancourt of the University of Ottawa and Aanchal Sharma of McMaster University is a worthy one, with great insight, and I'm not poking fun. But for those not in academia, like me, some of the passages are fascinating: "Examining participants’ global negative reactions (bitchy or not bitchy) to the confederate we found striking differences by condition (X2 (2) = 51.71; P<.0001; see Table I. Specifically, when women were rated as bitchy, all but 2 were in the sexy condition. And of those rated as not bitchy, most were in the conservative condition. The remaining eight women’s reactions were coded as unsure (two in the conservative condition and six in sexy condition)." I love it when you talk dirty.
5. Freelance writer Diana K. Sugg recounts a story about Ben Bernanke that's required reading for any student of the Federal Reserve. On TODAY Moms, Ms. Sugg tells of how she and her two kids - one was 10 months old at the time, the other a toddler - were on a red-eye from Washington to Zurich and sitting directly in front of Mr. Bernanke. This was January 2009, the height of the troubles. Needless to say, kids were being kids, and one even "jabbered at Bernanke in baby talk." When the plane landed, the Fed chief asked Ms. Sugg if she got any sleep. She said no, and apologized for the noise. Mr. Bernanke smiled and said that "I didn't hear a thing." I wonder if the more contentious FOMC meetings play out that way?
6. "The market has become a perverse mechanism where big monopolies dominate and ransack the people." One of the slogans from Occupy Wall Street this week? Nope, Venezuela's Hugo Chavez.
7. Britain's Transport Secretary Justine Greening warns that air travellers won't be able to escape body scans when they're fully introduced. There have been health and privacy concerns related to such scans, but, Ms. Greening said in a statement, "I do not believe that a 'pat down' search is equivalent in security terms to a security scan." Here's what interested me: "Software which automatically analyses images is currently in development. Where this technology has developed to a stage at which it passes rigorous government testing, airports will be expected to deploy it when they renew or replace their equipment. This will mean that in the future images will no longer be seen by human reviewers. In addition, airports will also be required to undertake routine testing of hardware and software to ensure that they remain unable to copy, save, or otherwise transmit images. This will be verified by the Department's transport security inspectors."
