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business briefing

These are stories Report on Business is following Thursday, Oct. 9, 2014.

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Rally fizzles
Mounting economic jitters gathered force today, crushing stock markets and roiling commodities and currencies.

Yesterday's post-Fed rally fizzled, and then some, as investors focused again on the outlook for the global economy. European Central Bank chief Mario Draghi added fuel to this week's fires with a warning about the troubled euro zone.

While Tokyo's Nikkei and major European exchanges fell, the bulk of the damage came later in North America, where the S&P 500 slumped more than 40 points, or 2.1 per cent, and the Dow Jones industrial average plunged 335 points, or 2 per cent.

Toronto's S&P/TSX composite lost more than 200 points, or 1.4 per cent, while oil prices sank and the Canadian dollar eroded, sliding to 89.5 cents U.S. by late in the day.

Today marked a quick and dramatic end to the stock rally that followed yesterday afternoon's release of the minutes of the last meeting of the Federal Reserve, which indicated a still-dovish central bank that had no rush to hike interest rates.

"The post-Fed minutes exuberance didn't last too long in Europe when reality sank in that Europe's still in trouble after more weak data from Germany and the bankruptcy of Espirito Santo Financial Group offered a reminder of the fragility of the European banking system," said analyst Jasper Lawler of CMC Markets in London.

"Volatility seems here to stay in U.S. markets with another triple digit move in the Dow early on, this time to the downside as Europeans concerns undo yesterday's Fed-based rally," he added in a research note.

"Trouble overseas didn't bother U.S. markets earlier this year but with stock valuations at lofty levels, investors are worried about anything that could derail earnings in [the third quarter] and expectations for [the fourth quarter], and right now that worry is centred on Europe."

Investors have been wringing their hands over the outlook for the global economy, given that the U.S. appears strong and is in the midst of winding down part of its stimulus.

Europe is in particular trouble, with the latest data from Germany today again highlighting the threat that the euro zone's powerhouse economy is running out of steam.

Just two days ago, markets plunged amid these fears, as well as a troubling new forecast from the International Monetary Fund, only to surge yesterday after the release of the Fed minutes.

And, thus, questions are being raised about the trigger fingers of edgy investors.

"There's a lot of fear in the markets at the moment and it's all centred around the Federal Reserve, when it will raise interest rates and the pace of hikes after the first one takes place," said market analyst Craig Erlam of Alpari in London.

"That fear is leading to some irrational moves in the markets, which concerns me given that it's occurring at these record high levels. Investors are clearly quite uncomfortable with current valuations and are hitting the panic button at the first sign of trouble, for example on Tuesday after the IMF revised down its global growth forecasts."

Indeed, the minutes of the last Fed meeting, the catalyst for the market bounce yesterday afternoon, showed the U.S. central bank is concerned over the reaction to its statements, and about what will happen when it inevitably changes its signal to the markets on the course of interest rates.

For now, the Fed maintains that it will hold its benchmark rate effectively at zero for a "considerable time" after it ends its asset-buying program.

Some observers had expected that line to change at the last meeting in mid-September. But, as the minutes showed, "the concern was raised that the reference to 'considerable time' in the current forward guidance could be misunderstood as a commitment rather than as data dependent."

There was more, of course. "Several" on the Federal Open Market Committee, the central bank's policy panel, believed the current language "suggested a longer period before liftoff," though it was also noted that the stance now "clearly indicated" that decisions are conditional on fresh data and what's expected going forward where the economy's concerned.

But at some point soon(ish), that stance will change, which could spell even more turmoil in the markets.

"The Fed is very aware of this, which is why it opted to maintain its commitment to keep rates low for a considerable amount of time," Mr. Erlam said.

"At some point this language will have to be removed, and when it does, it could prompt a significant correction. What we need now to calm the nerves is a very good earnings season, something that shows us that we don't need Fed stimulus to justify current valuation, that companies are performing well and things are only going to get better."

Mr. Erlam's not alone.

"The minutes also showed a Fed that is conflicted as to how to extract itself from its current guidance without sending the wrong message to the market as to the timing of any potential tightening of policy," said chief analyst Michael Hewson of CMC Markets.

"This unexpectedly dovish tone would appear to suggest that once again markets got their knickers in a twist over nothing, and that a Fed rate hike still remains some way off, though speculation about the timing will still continue with every subsequent bit of positive data over the coming weeks."

Central bank angst
Central bankers the world over are growing increasingly anxious over their currencies.

The latest are those at the Federal Reserve. As yesterday's minutes showed, "some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector."

This came amid a broad rally in the U.S. dollar, which eased yesterday after the Fed minutes were released, in turn pushing up Canada's currency, which soared as high as 90.23 cents U.S. today before sliding below the 90-cent mark.

Others are equally concerned over how the levels of their currencies could affect exports.

Late last month, for example, New Zealand's central bank intervened in currency markets, its chief Graeme Wheeler having said earlier that the strength of his money was "unjustified and unsustainable."

The Bank of Japan, too, has been troubled by the strength of the yen.

"The big trend dominating global markets since August has been strength in the U.S. dollar thanks to the diverging economic performance of the U.S. and the rest of the world and the implications for monetary policy," said CMC's Mr. Lawler.

"It has been the strength in the USD and weakness in Europe that is now causing concern amongst the FOMC for its implications on the U.S. economy," he added in a research note, referring to the greenback by its symbol.

"In essence because of the Fed, the U.S. dollar's strength could be its own undoing."

The Bank of England, by the way, held its benchmark rate steady today.

Canadian Tire unveils targets
Canadian Tire Corp. today unveiled an "aggressive" three-year plan to compete in a new world.

The iconic retailer said it is targeting annual sales growth of 3 per cent at its Canadian Tire stores, 5 per cent at Mark's and 9 per cent at FGL Sports, which includes Sport Chek, Hockey Experts, Sport Experts, National Sports and other brands.

In a statement before its investor conference, it also said it's aiming for a 9-per-cent return on invested capital by the end of 2017, and an average increase of 8 per cent to 10 per cent in earnings per share.

It added it expects to spend an average $575-million a year between 2015 and 2017 to invest in digital technology and upgrade stores.

"Meanwhile, we will continue to return capital to our shareholders – through dividend payments and buying back our shares when we believe that we are undervalued in the market and that it is the best use of our cash," incoming chief executive officer Michael Medline said as he also announced the retailer will buy back an additional $400-million in stock by the end of next year.

Desjardins analyst Keith Howlett, whose target on Canadian Tire stock is $129, deemed it all a "positive" development.

Merger dead
QLT Inc. says it is assessing "all potential strategic options" after its would-be U.S. merger partner opted for a superior proposal from an Irish pharmaceutical company, The Globe and Mail's Bertrand Marotte reports.

The one-time Vancouver biotech star said in June it had struck a merger deal with Auxilium Pharmaceuticals Inc. that would give Auxilium access to the Canadian marketplace as well as provide it with a more attractive tax regime.

Auxilium was to have taken control of QLT in an agreement that would give existing Auxilium shareholders 76-per-cent ownership of the new company.

But QLT said today Auxilium's board has determined that a rival offer from Endo International PLC is a better deal and that Auxilium is cancelling the merger with QLT.

QLT is to receive a termination fee of $28.4-million (U.S.).

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