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Morning Business Briefing

On markets, a 'wild week ends with a whimper' Add to ...

These are stories Report on Business is following Friday, July 12, 2013.

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Markets hold gains
Global markets are generally holding onto their strong gains, though at something of a slower pace after yesterday’s record-smashing performance in the United States.

Or, as Royal Bank of Canada put it today, a “wild week ends with a whimper.”

That’s not to suggest there’s no action, only that it’s muted compared to the jubilation that drove the S&P 500 and Dow Jones industrial average to closing highs yesterday in a rally inspired by Federal Reserve chairman Ben Bernanke.

At this point, markets are mixed.

Playing into that are stronger-than-expected quarterly results from two major U.S. banks and comments from China’s finance minister that appeared to suggest Beijing would accept an annual pace of economic growth of 7 per cent.

“In some respects the lack of momentum to the upside tends to give credence to the theory that much of the advancement yesterday was less about sentiment and more about short covering,” said senior market strategist Brenda Kelly of IG in London.

“An element of profit-taking, along with the remarks from China’s finance ministry which are attempting to temper expectations in respect of the country’s global growth, is putting some pressure on the mining sector.”

Tokyo’s Nikkei gained 0.2 per cent today, while Hong Kong’s Hang Seng lost 0.8 per cent. European markets were mixed by midday, while North American stocks were down slightly.

Yesterday’s global rally was sparked by Mr. Bernanke’s comments late Wednesday, when he reassured markets that the central bank would not pull back from its huge asset-buying program, known as quantitative easing or QE, before the economy is ready.

For all intents and purposes, that set the record straight after he’d send markets tumbling in June with the suggestion that the Fed could start to ease the monthly purchases worth $85-billion (U.S.) later this year.

Observers believed the central bank would begin to “taper” the program in the fall, and quit altogether sometime next year.

Mr. Bernanke didn’t give a timeline, but calmed investors nonetheless, suggesting, as well, that they not confuse the end of QE with the end of emergency-level interest rates.

The Fed’s benchmark rate is now effectively at zero, and the Fed plans to keep it there until unemployment eases to 6.5 per cent.

“It appears bullish equity traders are once again happy to rely on the ‘free insurance’ offered by Fed intervention and push risk assets higher – despite the general panic we saw in June when tapering appeared imminent,” said Matt Basi of CMC Markets in London.

“The marked decline in U.S. treasury yields and the spike higher in equity markets since chairman Bernanke’s statement are signs of a market re-positioning itself for medium-term QE support and with the U.S. gearing up for earnings season, any significant upside surprises could easily push the indices to fresh all-time highs.”

Scotiabank ends deal
Bank of Nova Scotia is pulling out of a deal to buy a chunk of Bank of Guangzhou, saying conditions have changed.

Scotiabank had planned to acquire 19.99 per cent of the bank, originally announcing details last September, The Globe and Mail's Tim Kiladze reports.

Today, however, the Canadian bank said it and the municipality involved have “re-evalued the proposed partnership in light of changing conditions.”

It did not spell out those conditions, however, and said it still plans to push ahead in the country.

“Scotiabank will continue to consider future opportunities for investment in China that are in line with our strategy and footprint in the region,” said Dieter Jentsch, Scotiabank’s chief of international banking.

“The bank also remains focused on our existing operations in the country including the recently announced Bank of Beijing Scotia Asset Management Joint Venture and 19-per-cent stake in Bank of Xi’an.”

JPMorgan beats estimates
JPMorgan Chase & Co. and Wells Fargo & Co. kicked off second-quarter earnings among the big U.S. banks with better-than-expected results.

JPMorgan profit climbed 31 per cent to $6.5-billion (U.S.) or $1.60 a share in the quarter, from $4.96-billion or $1.21 a year earlier. That included a gain on reduced loan loss reserves.

Revenue increased by 13 per cent.

“Loan growth across the industry continued to be soft, reflecting a cautious stance by consumers, many small businesses and corporations,” said chief executive officer Jamie Dimon.

“However, we continue to see broad-based signs that the U.S. economy is improving and we are hopeful that, as jobs are added and confidence builds, the U.S. economy will strengthen over time.”

Wells Fargo also topped estimates with a profit of $5.52-billion or 98 cents a shares, compared to $4.62-billion or 82 cents a year earlier.

Home prices at record
Canadian home prices are at record levels, though they got there at a slower pace, The Globe and Mail's Tara Perkins reports.

Prices climbed 1.8 per cent in June from a year earlier, according to the Teranet-National Bank home price index.

While that increase is the slowest since November, 2009, the index now stands at its highest ever.

Not only that, but prices in Toronto, Montreal, Quebec City, Winnipeg, Halifax and Hamilton are also at record highs.

On a month-over-month basis, prices rose 1 per cent from May.

“Though this increase may seem large, it is somewhat less than the average June gain of 1.2 per cent over the last 12 years,” said senior Marc Pinsonneault of National Bank of Canada.

“May, June and July are generally the months in which upward pressure on home prices is strongest,” he added.

“In the 15 years of index data collection, the composite index has not declined in any of these three months.”

On a year-over-year basis, prices rose 7 per cent in Hamilton, 5.6 per cent in Quebec City, 5.5 per cent in Calgary, 3.9 per cent in Winnipeg, 3 per cent in Edmonton, 3.6 per cent in Toronto, 2.3 per cent in Halifax, 1.4 per cent in Montreal, and 1.1 per cent in Ottawa-Gatineau.

British Columbia continued to suffer, with prices down 4.6 per cent in Victoria and 2.8 per cent in Vancouver.

Today’s report adds to evidence of a soft landing in Canada’s housing market, though with regional differences.

Domtar projects loss
Canada’s Domtar Corp. expects to post a second-quarter operating loss of $30-million (U.S.) to $35-million (U.S.)

That, the forest products company said today, includes a litigation-related settlement hit of $49-million, restructuring costs of $18-million, a $5-million charge for writedowns, and depreciation of $93-million.

Domtar reports results July 25.

“We had sub optimal pulp productivity and unusually high costs due to significant planned maintenance and delayed restarts in our pulp mills,” said chief executive officer John Williams.

“However, a closer look at our operations demonstrates that by quarter end we made very good progress on addressing production issues in the pulp and paper business. We remain confident that we will return to more normalized productivity levels across the business by the end of the third quarter.”

China's finance minister confuses investors
China’s finance minister has left some confusion in the markets with comments on the country’s economic growth projections.

At a conference in Washington, Lou Jiwei reminded investors to not “forget that our expected GDP growth rate this year is 7 per cent.”

But Beijing’s official goal is 7.5 per cent, and “the small difference in the annual average could have significant implications for the remainder of the year,” said Adam Cole of RBC Europe.

This comes in advance of official numbers expected Monday, which observers expect to show economic expansion of 7.5 per cent in the second quarter.

That, noted Mr. Cole, would put the average for the first half of the year at 7.7 per cent.

“To hit a 7-per-cent average for the full year, [the second half] would need to be nearer to 6 per cent than 7 per cent – a much more severe slowdown than generally expected,” said Mr. Cole.

“It is not clear whether Lou’s comments were a slip-up or a deliberate downgrade and no clarification has been offered subsequently.”

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