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Why there are ‘too many fires burning’ across financial markets Add to ...

These are stories Report on Business is following Monday, Jan. 27, 2014.

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Wildfires
Emerging market waters are somewhat calmer today, but observers fear more turmoil after a respite.

Indeed, warns Kit Juckes, the chief of foreign exchange at Société Générale, financial markets are grappling with “wildfires on four continents.”

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Key will be whether the Federal Reserve decides whether to pare its monthly purchases of assets again, as expected.

The U.S. central bank has already cut the bond-buying stimulus program, known as quantitative easing or QE, by $10-billion (U.S.) to $75-billion.

And analysts expect it to unveil a further $10-billion “taper” in Wednesday’s policy announcement.
“And that won’t help ease market tension,” Mr. Juckes said today.

“Market confident crises don’t often just blow over quickly on their own without policy action.”

Emerging market currencies have been sideswiped by concerns over how the Fed tapering program will hurt those economies, also sparking a rout on global stocks.

This morning, however, Turkey’s central bank helped ease the troubles by announcing plans for an emergency meeting tomorrow, a move that propped up the country’s embattled lira and supported other emerging markets, as well.

But, Mr. Juckes noted, there’s more than just the Fed speculation going on here.

“Absent help from the Fed, and in the run-up to the Chinese New Year, any respite will probably be temporary,” he said.

“Furthermore, the current period of market turmoil may have slower EM growth and the prospect of less accommodative Fed policy at its heart, but it has a log of regional sub-drivers: China’s shadow banking system, politics in Turkey, strikes in South Africa, more politics in Argentina, to name but a few,” he added.

“There are too many fires burning to expect them to all blow out simultaneously.”

Others agree that, longer term, there are so many factors playing into the market that analysts are raising some red flags going forward.

“The extent of Friday’s stock market falls would also seem to suggest that there could be further declines in the coming days and weeks, which would be somewhat ironic given that we are now seeing some significant improvements in a lot of the economic data not only coming out of the U.S. and the U.K., but also Europe as well,” said chief analyst Michael Hewson of CMC Markets in London.

“The fact is that in the last 12 months, we haven’t really seen a decent correction in U.S. markets, or European ones for that matter and with some doubts about valuations any nervousness on the part on investors is likely to see further volatile trading,” he added.

“The irony is that the improving economic data is bringing forward future expectations of slightly higher interest rates, not only in the U.S., but the U.K. as well and it seems quite likely that if the Fed does decide to taper another $10-billion of asset purchases then the flow of funds coming out of emerging markets could well turn into a torrent, and the outgoing tide could well reveal some rather unpleasant truths, and significant side effects.”

BMO eyes deal
Bank of Montreal is eyeing a $1.3-billion acquisition of British fund firm F&C Asset Management, with the two parties already in "advanced discussions," The Globe and Mail's Tim Kiladze reports.

F&C said today it received an indicative offer from BMO, adding that the Canadian bank is likely to put in a firm bid worth 120 pence per share, and pay in cash.

Should a deal be inked, it will add to a growing list of asset management deals Canadian banks recently struck outside their home country. Since 2010 the list of acquisitions include: Royal Bank of Canada buying London's BlueBay Asset Management; Toronto-Dominion Bank buying Epoch Holding Corp. in the U.S.; and Canadian Imperial Bank of Commerce buying a 41 per cent stake in American Century Investments from JP Morgan Chase & Co.

Saks to open in downtown Toronto
Hudson’s Bay Co. is selling its flagship Queen Street store in downtown Toronto along with its adjacent office tower for $650-million, with plans to open its first Saks store at the site, The Globe and Mail's Marina Strauss reports.

HBC announced today that it's selling the two properties to Cadillac Fairview Corp. and launching its first Saks store at the location, scuttling earlier plans to open its first Saks at Yonge and Bloor Street in Toronto, where it was slated to replace a Bay outlet.

HBC chief executive officer Richard Baker said in a brief interview that Cadillac Fairview CEO John Sullivan convinced him to roll out Saks at the Queen Street store, where it will share space with the Bay.

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