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Stories Report on Business is following today:
German short-selling ban triggers selloff
Germany's surprise decision to temporarily ban naked short-selling on some stocks, bonds and credit default swaps rattled global financial markets today, driving down stocks, commodities such as oil and metals, and the Canadian dollar . Oil later regained ground. The euro also initially slumped to fresh four-year lows, though later climbed back on speculation European authorities would intervene in markets, while the loonie closed down 0.66 of a cent at 95.77 cents U.S.
Europe's markets have been battered by the continent's debt crisis, and even a $1-trillion support package from the EU, International Monetary Fund and European Central Bank have failed to calm investors. Germany's decision late yesterday caught investors off guard, and that rippled through the markets.
"It mimics the same mechanism that was used by U.K. and U.S. authorities to little effect, to try and prop up the equity markets in 2008 in the wake of the Lehman crisis," said CMC Markets analyst Michael Hewson. "If anything, the bans in 2008 exacerbated market declines and volatility, as investors took fright and bailed out of the whole sector and the Germans run the risk of causing the same mayhem."
Investors sell short by selling borrowed securities in hopes of buying them back later at a lower cost. The more controversial naked selling involves selling securities before ensuring they can be borrowed.
German Chancellor Angela Merkel, who has been at the forefront of attempts to ease the euro crisis, told politicians today that Europe needs "a new culture of stability" and that moves to guard the markets are "no more and no less than the preservation of the European idea."
Fighting back against speculation in the markets, Ms. Merkel warned that "the lack of rules and limits can make behaviour in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world."
Read: David Berman's Market Blog on 'correction averted'
Read: Markets hit by German trading curbs
Related: Speculators targeted in new trading rules
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German move triggers backlash
Several analysts questioned Germany's move, saying the ban appeared as an act of desperation. "Germany just switched off the financial lights in Europe," one currency trader told Reuters this morning.
And, The Financial Times reports this morning, a backlash is building in Europe among countries such as Sweden, Holland and France, whose finance minister called for an urgent meeting of regulators to discuss the move.
RBC Dominion Securities strategists criticized the move in a research note this morning, saying that if the intent was to calm markets, the opposite occurred.
"With the same light touch as a German Oom-Pah band playing jazz, BaFin (the German financial supervisory authority, also known as Bundesanstalt für Finanzdienstleistungsaufsicht) undertook an ill-timed and heavy-handed regulatory step overnight that rattled markets. The organization temporarily (through 31 March 2011) prohibited uncovered short sales of debt securities 'admitted on a domestic exchange to trading on the regulated market' and 'naked' CDS," fixed income strategist Mark Chandler and fixed income analyst Kam Bath wrote.
"It is unclear what is most egregious about the move - whether it is that the German authorities are acting unilaterally without their European counterparts, whether the moves appear 'ad hoc' and happened at a time when sovereign spreads were already retreating after the combined actions of the EC ministers and ECB last week or whether it simply reflects how tentative the political situation is for Chancellor Merkel in Germany (or, more ominously, perhaps the stability of the German banking sector is more in doubt than we thought)."
Read: Backlash builds against German ban
How crisis could affect Canada
Initially seen as a regional issue that could be contained, economists are now speculating over what Europe's mounting debt troubles could mean for Canada and its central bank. Some observers now believe Bank of Canada Governor Mark Carney may not hike rates as early as June 1 given the turmoil in financial markets and the volatility in currency trading.
The impact on Canada would come largely via that turmoil and the impact on commodity prices, which have been hit by Europe's troubles and are key to Canada's economy given its resource base. The direct impact, BMO Nesbitt Burns said in a report today, is "meaningful, but certainly manageable." The EU has accounted recently for just 8.6 per cent of Canadian exports, and slightly less than 5 per cent when Britain is excluded," said BMO economists Douglas Porter and Benjamin Reitzes. "Thus, it would take a 2-percentage-point drop in euro zone GDP, a heavy hit indeed, to shave even 0.1 percentage points from Canadian GDP," they said.
However, they noted, "as vividly illustrated in the past month, the spillover from Europe can seep into Canada through softer equity markets, wider credit spreads, and even higher interbank lending costs." And, they warned, Europe's debt crisis "poses serious risks" to Canada's outlook given the market volatility and the fallout on resource prices.
"We have yet to cut our growth forecast for Canada, although we are honing our axe for the first time in more than a year," Mr. Porter and Mr. Reitzes said. "... We would conclude by suggesting that while the economy and the Bank of Canada may not take a European vacation, many Canadians likely will as the Canadian dollar is now pressing up against record highs against the euro and sterling."
U.S. inflation tame
The latest reading of inflation in the United States will allow the Federal Reserve to hold its benchmark lending rate at its historic low near zero. The U.S. Labor Department said this morning consumer prices in the United States fell 0.1 per cent in April from a month earlier, marking the first dip in more than a year. The so-called core measure, which excludes volatile items such as energy prices, was flat.
The inflation reading is good news for the U.S. central bank as it illustrates that the economy is rebounding without sparking price hikes, and it allows chairman Ben Bernanke to continue to stoke the recovery with the easiest monetary policy on record.
"As the economy continues to expand and adds back more than 6 million workers to payrolls by the end of 2011, diminishing slack should temper any downward pressure on CPI," said Beata Caranci, the director of economic forecasting at Toronto-Dominion Bank. "But, a word to the wise: if inflation does dip and get close to deflation territory, keep your eye on market expectations for a cue as to whether markets believe it will be transitory or not. Up until now, markets, consumers and businesses all agreed that any down-leg in inflation will not be sustained, as 1- to 5-year inflation expectations are hovering in the 2- to 3-per-cent range. As far as inflation concerns go, the Fed can leave it on the backburner and remain focused on monetary settings that spur economic growth and bring down unemployment."
Added economist Sal Guatieri of BMO Nesbitt Burns: "Disinflation is firmly entrenched in the U.S. economy, a big plus for debt markets, and a positive for equities too - provided we don't slip into deflation. Read the story
Related: David Berman's Market Blog on deflation fears
Related: Krugman addresses deflation threat
Related: Fed boosts outlook for 2010
Others warned on debt
While Europe has become the flash point for ballooning government debt in the wake of the financial crisis and recession, it is by no means alone. The International Monetary Fund warned in a new report today that Japan must get its fiscal house in order. "With global scrutiny of public finances increasing, the need for early and credible fiscal adjustment has become critical," the global body said.
And New York University professor Nouriel Roubini said in London yesterday that other countries could also soon face the wrath of the bond markets. "Bond market vigilantes have already woken up in Greece, in Spain, in Portugal, in Ireland, in Iceland, and soon enough they could wake up in the U.K., in Japan, in the United States, if we keep on running very large fiscal deficits," he said at an event at the London School of Economics, according to Bloomberg News.
Nexen Inc. announced late today that it struck a deal to sell its western Canadian heavy oil properties to Northern Blizzard Resources Inc., a privately-held company, for $975-million. The properties have proved reserves of 39 million barrels of oil equivalent, and in the past year have averaged production of 16,100 barrels of oil equivalent a day from 750 net weels. The Calgary-based company said it still expects to meet its original 2010 forecasts. "With this sale, we have achieved our target of generating $1-billion of proceeds from the sale of non-core assets," said chief executive officer Marvin Romanow.
Oil sands set to top crude imports to U.S.
Alberta's oil sands are set to become the top source of U.S. crude oil imports this year, a new analysis finds. IHS CERA, which advises energy companies, governments and other bodies, says production from the oil sands, combined with Canadian exports of conventional crude, has already made Canada the top foreign supplier of oil to the United States. It noted that oil sands production more than doubled to 1.35 million barrels a day last year from 600,000 in 2000. The potential, the report says, is far larger, and growth in the oil sands could put production at about 5.7 million barrels a day by 2030.
"The fact that oil sands by themselves - were they a country - are set to become the largest single source of U.S. crude oil imports this year, emphasizes the importance they have attained as a supply source for the United States," said IHS CERA chairman Daniel Yergin. "This ranking demonstrates the impact of investment and innovation over the last decade. It also shows how integrated Canada and the United States are in terms of energy, as in their overall economies."
Related: Jeff Rubin on why China, not the U.S., will be the oil sands' market
U.S. foreclosures hit record levels
The crisis in U.S. housing continues apace, though observers say it appears to be stabilizing. The Mortgage Bankers Association said today that more than 10 per cent of U.S. homeowners missed at least one mortgage payment in the first quarter, a record and an increase from 9.5 per cent in the final quarter of last year. When not adjusted for seasonal variations, the number actually fell. Still, about 4.6 per cent of homeowners also suffered foreclosure, which is also a record level, though up marginally from the fourth quarter. "I don't see signs now that it's getting worse, but it's going to take a while," the group's chief economist told The Associated Press. "A bad situation that's not getting worse is still bad."
Housing starts rebound
Home construction in Canada rebounded in the second half of 2009 year and early this year, and is expected to stabilize over the next two years, Canada Mortgage and Housing Corp. said this morning.
Housing starts last year came in at 149,081, CMHC said in its second-quarter outlook, and are expected to range between 166,900 and 199,600 this year. Next year, starts are projected to total between 148,600 and 208,800, suggesting the new home market will continue to recover but the pace of growth could slow.
"Moving forward, housing starts will moderate as activity becomes more in line with long-term demographic fundamentals," CMHC chief economist Bob Dugan said.
Unlike other forecasters, CMHC also said it expects home prices to rise modestly. Read the story
RIM among top handset makers
Research In Motion Ltd. has jumped into the ranks of the world's top handset manufacturers, outpacing the likes of Sony Ericcson and Motorola Inc. , market researcher Gartner Inc. said this morning.
RIM's BlackBerry grabbed 3.4 per cent of the mobile device market in the first quarter of the year, up from 2.7 per cent a year earlier, Gartner said. While well behind Nokia and Samsung, and slightly behind LG, RIM gained from a year earlier as Sony Ericcson and Motorola lost market share.
"This quarter saw RIM, a pure smart phone player, make its debut in the top five mobile devices manufacturers, and saw Apple increase its market share by 1.2 percentage points," Gartner research vice-president Carolina Milanesi said in a statement. "... RIM's mobile phone sales reached 10.6 million units in the first quarter of 2010, a 45.9-per-cent increase year-on-year."
Over all, Gartner said, mobile phone sales globally rose 17 per cent in the first quarter to almost 315 million units.
Canaccord profit doubles
Canaccord Financial Inc. doubled its fourth-quarter profit to $7.53-million or 14 cents a share from $3.67-million or 7 cents a year earlier. Revenue surged 34 per cent to $143.1-million. "Our recent acquisition of Genuity Capital Markets has greatly enhanced our capital markets capabilities, while investments in our wealth management group are beginning to show early signs of success," said Paul Reynolds, chief executive officer of Canada's biggest independent brokerage. Read the story
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