The danger of a bear market.
Stories Report on Business is following today:
The morning after
Well, that didn't last long.
Yesterday's euphoria over the $1-trillion rescue of the euro evaporated this morning, knocking global stocks and the common currency, as investors took a sober second look and decided Europe's debt troubles are far from over.
"Today is the second day, the day after that glorious first day," said Carl Weinberg of High Frequency Economics. "As we anticipated, the 'solution' proposed by the EU governments is not standing the test of time! We think there are incredible gaps and deficiencies in this collection of facilities and measures that are important enough to make us believe that the crisis is not over yet. The market is wrapping its collective head around those gaps and deficiencies this morning."
Yesterday's market rally was sparked by a weekend agreement that pledged up to €750-billion in loans and guarantees from the EU and IMF to support euro zone countries unable to roll over their debts or fund their budget shortfalls. That came on top of €110-billion already promised to Greece. As well, central banks began buying government debt in the markets and reinstated foreign exchange swap lines to ensure the European Central Bank has enough U.S. dollars.
But markets are taking a deeper look, and there are fears over whether the weaker European economies can bring their finances into line, and some speculation that they may simply dilly dally given the implicit support.
There are also fears over what this all could mean for Europe's economic growth.
"While we do expect to see some negative fallout on the growth front given the magnitude of the bailout package, bear in mind that Greece only accounts for 2.6 per cent of GDP, while Portugal is even smaller at 1.8 per cent," said Scotia Capital economists Derek Holt and Karen Cordes Woods. "Germany and France, however, which account for almost 50 per cent of real GDP at 26.8 per cent and 21.5 per cent, respectively, continue to chug along at a decent pace. While the [first-quarter]real GDP results set to be released on Wednesday for Germany and the EU could disappoint expectations and show a decline during the quarter - which could spark temporary weakness once again - much of that can be attributed to the cold winter which was the coldest on record in 14 years, with the expectation that growth will rebound in [the second quarter]"
Read
Europe buys time with rescue plan
Central banks take on a new saviour role
Boyd Erman: The end of the road for rescue plans
David Rosenberg: Rescue plan fails to resolve structural fiscal issues
Margaret Wente: The age of the big blow-up
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Mortgage rates fall on EU crisis
The EU's debt crisis has indirectly taken some of the pressure off Canada's real estate market, leading to a cut in mortgage rates among the country's major banks. Canadian lenders boosted rates early last months, and most observers forecast a continued rise. But several banks retraced and cut those rates in the past week as Europe's troubles sent money into Canada's bond market, pushing down yields. Those yields have an effect on the cost of funding the bank's fixed five-year mortgage loans. Read the story
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How last week's meltdown unfolded
One hefty trade in Chicago last Thursday may have played a big role in the afternoon stock market meltdown, The Wall Street Journal reports today. With markets already under pressure from global developments, the $7.5-million bet in the Chicago options trading pits may have served as something of a spark about 20 minutes before the heart-stopping plunge of almost 1,000 points in the Dow Jones industrial average, the newspaper says.
The trade was made by Universa, a hedge fund that, ironically, is advised by Nassim Taleb, who authored Black Swan: The Impact of the Highly Improbable. Universa purchased 50,000 options contracts betting that stocks would continue to fall. Those contracts would pay about $4-billion if the S&P 500, which stood at 1145 points when the trade was made, hit 800 in June.
That appeared to ripple through the markets, The Journal reports, leading traders on the other side of the deal to sell, in a bid to bring down their own risks. Among those on the other side was Barclays Capital, according to the report. "Then, as the market fell, those declines are likely to have forced even more 'hedging' sales, creating a tsunami of pressure that spread to nearly all parts of the market."
Stock exchanges were clogged by huge orders, leading to some of the bigger rapid-fire trading hedge funds to pull back from the market. The reconstruction of events, the report says, suggests that a so-called fat-finger error was not the cause of the plunge. But it does highlight concerns about the computer-generated diverse trading of stocks, it says.
Related: Market safeguards get thumbs-up to modernization plan
Toyota posts quarterly profit
Toyota Motor Corp. topped estimates today with a fourth-quarter profit of ¥112-billion, or $1.2-billion (U.S.), a turnaround from a loss of ¥766-billion a year earlier, but disappointed analysts with a forecast for annual operating profit of just ¥280-billion.
"The forecast is really quite weak compared to the consensus, but given their overall situation right now I don't think they could really put out a strong forecast," one fund manager in Tokyo told the Reuters news agency. "The biggest risk I see for next year isn't just limited to Toyota; it's really more whether the global automobile market will hold up once all the rebate schemes expire."
Toyota's reputation has been hammered by safety issues related to its massive recalls, and litigation costs loom, while the auto maker has said it is committed to safety and quality, and has been working to fix the problems. Read the story
Related: A warning for Detroit auto makers
China inflation hits 18-month high
Also troubling markets today are concerns that hotter inflation in China will prompt its central bank to tighten monetary policy and slow growth in the surging economy. Annual inflation rose in April to an 18-month high of 2.8 per cent, still below the government's target of 3 per cent but inching ever closer. Notable was that real estate prices rose at their fastest pace on record.
"In a sense it is somewhat paradoxical that Chinese data showing stronger than expected loan and property price growth has had a negative impact on the global financial market tone today, given that they are a sign of robust growth," said Scotia Capital currency strategist Sacha Tihanyi. "Chinese growth is a key driver of global growth and a strong support factor for the commodity currencies. However, the concern today has now become whether the Chinese economy has moved too far ahead of monetary tightening."
While China's economy has surged, inflation is shaping up as the next problem for Beijing and its central bank, Globe and Mail correspondent Mark MacKinnon reports.
Read
China prices point to tightening
Inflation threatens to slow China's economy
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