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Commodities rout continues, sinks stocks, Canadian dollar

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Commodities sink The rout in commodities markets continued today, pulling down stocks and the Canadian dollar , fuelled by economic jitters and another move by China to curb inflation.

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"Today's trading pattern can be summed up by 'risk off,'" said Scotia Capital currency strategist Camilla Sutton.

"The combination of higher margins at the CME, a temporary halt in the crude futures complex yesterday, a hike in China's reserve ratio, rising fears over global growth, concerns over Europe, strong U.S. export data and soft European and Australian data have sent shivers down the spines of traders. In this environment equities and commodities are weak and the [U.S. dollar]is broadly stronger."

The commodities rout began early from where it left off yesterday, then picked up some speed after China boosted reserve requirements on the country's banks again. The drop in oil was pushed along by a new forecast by the International Energy Agency, which trimmed its outlook for fuel demand by 0.2 per cent.

Prices for commodities such as oil , gold , silver and copper slipped.

Global stock markets also fell. Tokyo's benchmark Nikkei fell 1.5 per cent, and Hong Kong's Hang Seng 0.9 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by between 1.2 per cent and 1.6 per cent by about 8 a.m. ET. Dow Jones industrial average and S&P 500 were also lower.

"Having stabilized through the Asian session, commodities, and with them commodity currencies, are weaker again in Europe," said Adam Cole, global chief of foreign exchange strategy at Royal Bank of Canada.

"Crude is down another US$1 at US$97.20 a barrel and most other hard and soft commodities are following," he added ... Equities are weaker across the board, with energy and basic materials leading the way. Once again, it is difficult to identify an immediate catalyst for the fall in commodity prices or risk appetite more generally, but as usual [U.S. dollar]and [Japanese yen]are the main beneficiaries."

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China moves on lending again China boosted the reserve requirements on most of the country's banks again today, another in a series of moves to tame inflation.

The People's Bank of China could have instead boosted interest rates - and that yet may come - but some observers believe the central bank would rather try to rein in lending given recent indicators that suggest the economy's rapid growth is easing.

Just yesterday, China released its latest reading showing that annual inflation dipped in April to 5.3 per cent, down by a sliver from 5.4 per cent a month earlier.

Today, authorities boosted reserve requirements by half a percentage point.

"While rates differ between banks, the required reserve ratio (RRR) for most of the larger banks will now rise to 21 per cent," said Mark Williams, senior China economist at Capital Economics in London.

"The moves help the central bank prevent its own foreign exchange purchases from fuelling a continued surge in lending ... Looking ahead, there is a good chance that the pace of RRR increases will now slow. April's data signaled that activity growth is weakening, with the retail sales figures particularly downbeat. Of course, consumer price inflation is still high, but significant further increases in the headline rate look unlikely, based on recent price trends."

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Surprise, surprise The International Monetary Fund has raised its outlook for economic growth in Europe, but warned today that much work remains as the continent tackles a spreading debt crisis.

"At the national level, strong adjustment policies are being implemented to rebuild and bolster confidence," the IMF said in its report, noting that growth will be stronger in Europe's emerging economies than in the advanced countries.

"At the regional level, the crisis management capacity of the European Union (EU) is being strengthened, and the governance framework revamped. Important actions are still required to deal decisively with weak banks across Europe's advanced economies, and to follow through with implementing the EU-wide reforms that have been agreed in principle."

The IMF also issued a harsh warning on the potential snowball effect.

"Strong policy responses have successfully contained the sovereign debt and financial sector troubles in the euro area periphery so far, but contagion to the core euro area, and then onward to emerging Europe, remains a tangible downside risk," it said.

Speculation continues to mount in the euro zone that Greece will be forced to restructure its debt, despite the country's denial. Euro zone finance officials are also scheduled to meet next week, when they will talk about the possibility of more aid to the country.

"Bearish sentiment towards the euro continues to build on the basis of a lack of urgency with respect to Greece's fiscal problems," said CMC Markets analyst Michael Hewson.

"Another general strike by unions yesterday highlights the concerns that even if further aid were forthcoming there would be no guarantee that the Greek authorities would be able to implement the extra austerity required in exchange for that aid. As two-year Greek yields hit 26% it is becoming increasingly clear that a tipping point is fast approaching, as it became apparent that no swift decision would be forthcoming before next week."

Strong quarter for BCE BCE Inc. reported strong first quarter results on Thursday, announcing a 5-per-cent dividend increase and making further gains in wireless, even as overall profit dropped by about 28 per cent.

Overall profit fell to $503-million or 67 cents a share, from $706-million or 92 cents a year earlier, as fierce competition ramped up in the wireless space and core wired businesses, such as home phones continued a gradual decline, Globe and Mail telecom writer Iain Marlow reports.

However, adjusted earnings per share were up to 72 cents per share from 61 cents last quarter when the sale of non-core assets last year are factored out. Profit margins also improved.

BCE also boosted its outlook for the year, and now projects revenue growth of 9 per cent to 11 per cent, and an increase in adjusted earnings per share to between $2.95 and $3.05.

UBS analyst Phillip Huang said the results were "very strong," though he held his 12-month price target on the stock at $39, still with a "buy" rating.

Everyone loves Timmys Tim Hortons Inc. profit jumped in the first quarter as same-store sales, a key measure, climbed.

The coffee and doughnut chain earned $80.7-million or 48 cents a share, diluted, in the quarter, up from $78.9-million or 45 cents a year earlier. Revenue climbed more than 10 per cent to $643.5-million.

Cineplex results no blockbuster Cineplex Inc. results slumped in the first quarter as the theatre chain posted a loss of $800,000, compared to a profit of $3.8-million a year earlier, as revenue slipped 13 per cent and attendance almost 15 per cent.

"Although the exhibition industry experienced a box office decline from the record results in [the first quarter of 2010]our diversified business model and related revenue streams provided significant other revenue growth over the prior year," said chief executive officer Ellis Jacob,

In International Business today

With the election out of the way and political uncertainty now removed, Canada and Columbia are expected to move quickly on a free trade agreement. The Globe and Mail's Shawn McCarthy reports from Bogota.

Trade this year through Port Metro Vancouver is static and one of the reasons is Japan, in part because of the terrible earthquake and tsunami that hit the country, as well as changes in demand for goods from the island nation, The Globe and Mail's David Ebner writes.

In Economy Lab today

Economist Stephen Gordon explains why high gasoline prices can be good for Canada.

In Personal Finance today

Before you negotiate your mortgage, find out what you can do to polish up some of the common flaws that put off lenders.

Joint ownership is not necessarily the best option, and can result in an unintended tax burden, Tim Cestnick writes.

Some 79 per cent of Canadians aren't fully confident in their ability to teach another person about saving and budgeting, a poll shows.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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