These are stories Report on Business is following Thursday, May 23, 2013.
Flaherty frets about CMHC
With apologies to The Daily Show’s Jon Stewart, our national pastime is actually fretting over whether or not we have a housing bubble.
We don’t, Finance Minister Jim Flaherty says. But we would have a bubble had he not intervened in the mortgage market four times, the latest being last summer. And he’s still worried about some elements.
“I see some people worrying about it,” Mr. Flaherty told a Senate committee hearing last night.
“We do not have a bubble. I think if we had failed to take some action we would have had a bubble.”
Some economists, though not the majority, agree with the finance minister, believing that what had once been a frothy housing market is now in the midst of a soft landing.
Home sales have plunged, true, but prices have generally held up in most regions of Canada.
Mr. Flaherty said he welcomes the cooling of the residential housing market, notably where condominiums are concerned.
Last year, the finance minister said, some developers flagged concerns of buyers paying overly high prices for some condos, and he moved to tighten that as consumer debt levels soared.
“The governor of the Bank of Canada has indicated that the policy rate of the bank is not likely to change for some time, so this is a persisting problem,” he added.
Mr. Flaherty said, however, that he still has concerns about Canada Mortgage and Housing Corp., even after some changes to the country’s mortgage insurer last year.
“They still insure what are called portfolio residential mortgages,” he said.
“Those are residential mortgages held by the banks that are not insured mortgages, not high-ratio mortgage, and therefore obligated to be insured,” the finance minister added.
“We talk about that in the budget this year, and we are looking at that, as well.”
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Markets in turmoil
North American markets picked up after rough morning session that saw Tokyo's Nikkei plunge, spooked by a weak economic reading in China and questions about the Federal Reserve’s stimulus plans.
“Yesterday markets seemed unstoppable, with the rally carrying all before it,” said market analyst Chris Beauchamp of IG in London.
“Ben Bernanke’s testimony seemed to fire the starting gun on yet another rally in risky assets, but not even 24 hours later the mood has switched from greedy to fearful.”
Mr. Beauchamp was referring to the wild swings in the markets, which began after the Federal Reserve chairman appeared to tell investors just what they wanted to hear, that a premature pullback from the central bank’s huge quantitative easing program could kill the recovery.
That bond-buying scheme has helped drive markets to fresh highs, and investors feared the Fed could start to taper off before the economy could withstand it.
But then later, in a question-and-answer session at his congressional hearing, and then with the release of the minutes of the last Fed meeting, the central bank effectively left markets guessing as to when it will begin to ease off the $85-billion-a-month asset-buying program known as QE3, as The Globe and Mail’s Kevin Carmichael reports.
That sent markets into a tizzy. And today, a manufacturing reading showing China’s factory sector in retreat sparked a fresh frenzy.
“Taken in isolation, the Ben Bernanke speech, the Fed minutes and the China data would probably only have a limited impact, but having come all at once investors are finding it hard to be particularly sanguine,” Mr. Beauchamp said.
“That said, even if this does turn into a sustained down move over a period of a week or two the fundamental narrative of central bank easing and improving economic data should reassert itself.”
As The Globe and Mail’s Eric Reguly reports, it began with Tokyo’s Nikkei plunging 7.3 per cent, and Hong Kong’s Hang Seng 2.5 per cent, then spread to Europe, where London’s FTSE 100, Germany’s DAX and the Paris CAC 40 fell by more than 2 per cent.
The pessimism then carried over into North America, with losses for the S&P 500, Dow Jones industrial average and Toronto's S&P/TSX composite, though all began to retrace those declines in the morning.
“Obviously weak data from China overnight didn’t help sentiment in the short term, but markets sent a very clear message to central bankers last night that if the free bar closes, everyone’s going home,” said Matt Basi of CMC Markets in London.
- Follow our Inside the Market blog
- Scott Barlow in ROB Insight (for subscribers): Confusion reigns after Asian market meltdown
- Tokyo market plummets more than 7%, drags down global stocks
- Carl Weinberg in Economy Lab: Japan's 'demographics of doom' trump market-stimulating tricks
- China factory activity shrinks for first time in seven months
- Fed’s policy discord makes market uneasy
It’s not just the stock market. Currencies and bonds, too, were roiled, though the Canadian dollar climbed back.
At one point overnight, the Canadian currency hit a 12-month low of 96.21 cents, just before the release of the China numbers.
Along with the Australian and New Zealand dollars, the loonie was among the stronger currencies today, "which is odd considering the disappointing China release," said senior economist Jennifer Lee of BMO Nesbitt Burns.
There’s a lot going on here, said Stephen Gallo, Bank of Montreal’s European chief of foreign exchange strategy, and it’s complex.
“Over all, our take is that this latest ‘twist’ in market psychology is related to the fact that we are undoubtedly still participating in a world full of QE tapering potential, whilst global economic fundamentals – in aggregate – appear to indicate that QE tapering may not occur as smoothly or be as timely as many would hope; this, we think, is the macro link between the latest Chinese data and the persistent weakness in Europe on the one hand and a retrenchment in global capital flows due to QE tapering on the other,” Mr. Gallo said.
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Canada threatens trade fight
The Canadian government today threatened a trade fight with the United States over meat-labelling rules.
“Canada will consider all options at its disposal, including, if necessary, the use of retaliatory measures,” Trade Minister Ed Fast and Agriculture Minister Gerry Ritz said in a statement, though they did not indicate what such moves could be.
The fight is over what is known as Country of Origin Labelling, or COOL, which mandates tracking of beef and pork.
The labelling is said to be costly and the system one that requires more red tape.
“Canada is extremely disappointed with the regulatory changes put forward by the United States today with respect to COOL,” the Canadian officials said.
“These changes will not bring the United States into compliance with its [World Trade Organization] obligations. These changes will increase discrimination against Canadian cattle and hogs and increase damages to industry on both sides of the border.”
TD profit shy of estimates
Toronto-Dominion Bank’s hot profit growth has cooled, suggesting the uncertain economy is taking its toll, The Globe and Mail’s Tim Kiladze reports.
TD today kicked off the latest round of Canadian bank earnings by posting a second-quarter profit of $1.72-billion or $1.78 a share, up from $1.69 a year earlier, though also $1.78. That fell shy of analysts’ estimates of $1.86 a share in the latest quarter.
Wholesale banking helped the overall picture, as did U.S. loan growth.
"We are pleased with our results for the quarter, given the backdrop of low interest rates and slower economic growth,” said chief executive officer Ed Clark.
- TD profit falls short of expectations, rises slightly
- Tim Kiladze in Streetwise (for subscribers): TD's U.S. loan growth a bright spot for the bank
Marathon ends talks
Marathon Oil Corp. has called off talks to sell a portion of its stake in a major Alberta oil sands mining operation, adding to a growing list of sales efforts in the sector that have come up dry, The Globe and Mail's Jeffrey Jones reports.
Houston-based Marathon said in October it was in discussions to sell part of its 20-per-cent interest in the Athabasca Oil Sands Project, operated by Royal Dutch Shell PLC. It did not name the suitor, though Reuters had reported India’s Oil and Natural Gas Corp. approached Marathon to buy half its interest in the 255,000-barrel-a-day development.
“An agreement was not reached with the prospective purchaser and negotiations have been terminated,” Marathon said in a statement today.
Mobilicity tweaks deal
Mobilicity’s bond holders have given their blessing to a $380-million acquisition deal by Telus Corp., The Globe and Mail's Rita Trichur reports.
The Vaughan, Ontario-based carrier, which is legally known as Data & Audio-Visual Enterprises Holdings Inc., said its debt holders approved the Telus acquisition plan at a meeting in downtown Toronto this morning.
Mobilicity had tweaked certain terms of that agreement just hours before its noteholders were due to vote on the deal.
The ties that bind
Employees of the Liquor Control Board of Ontario are about to go a little more casual.
And not just on Fridays.
The 6,700 employees, who came within inches of a strike before the holiday weekend, not only won signing bonuses that will be followed by annual wage hikes.
They also bargained for the right to ditch their ties.
“The employer agreed to discontinue use of ties and cross-over ties,” the Ontario Public Service Employees Union says in the highlights of the tentative deal.
(There’s also now a $200-a-year clothing allowance for seasonal workers, but presumably that money won’t be spent on ties.)
The opt-out-of-the-tie provision of the deal will go into effect within a month of ratification of the deal by union members, who vote June 3 and June 4.
Aside from no ties, the union bargained for an $800 signing bonus in each of 2013 and 2014, and wage increases of 1.95 per cent in each of 2015 and 2016.
(Those pay hikes are well above the current pace of inflation, though it’s projected to rise to about 2 per cent by the time of the first increase.)
Also included in the deal are pledges for new full-time jobs, longer bereavement leave, and new shifts in some outlets.
Casual employees, however, will now be paid 3 per cent below the current starting rate.
Streetwise (for subscribers)
- Reporting rules relaxed for upstream oil sector mergers
- TD's U.S. loan growth a bright spot for the bank
- New dark pool rules called into question
- Waiting for M&A to return, Bay St. feels pinch
- Japan's 'demographics of doom' trump market-stimulating tricks
- Fiat Industrial's tax move a blow to Italian government
ROB Insight (for subscribers)
- Confusion reigns after Asian market meltdown
- Yahoo buys Tumblr: Too much for what it's getting?
- Is it too late to switch from Canadian bank stocks to U.S.?