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Markets dogged by U.S. vote (every 4 years), Greek woes (way more often)

These are stories Report on Business is following Monday, Nov. 5, 2012.

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On the minds of investors
Two big things are dogging global markets today. One pops up every four years, the other with far greater frequency.

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Investors are, of course, waiting for the outcome of tomorrow's close U.S. election. But also weighing on their minds are key votes in Greece amid another round of strikes by a populace devastated by anti-austerity measures.

"Intrade gamblers still see Obama as the favourite at 65 per cent to 35 per cent, with the Democrats retaining the Senate (74 per cent) and the Republicans having a lock on the House (95 per cent)," said senior economist Sal Guatieri of BMO Nesbitt Burns, referring to the site that allows investors to peg the outcome.

"Whoever wins will need to deal with a broad range of issues, from smoothing out the 'fiscal cliff' impact on the economy, to wrestling down the budget deficit, to raising the debt ceiling, to reforming the tax system," Mr. Guatieri said.

"Hopefully, the president will be able to deal with a more bipartisan congress to make quick progress on these issues, all of which are cited by business leaders as reasons for holding back spending and hiring," he added in a research note today.

"Probably the worst case for financial markets would be an indecisive election requiring a recount that could drag on for weeks. In the event of an electoral college tie (269 to 269), Romney would likely become president should the Republicans hold the House. For bond markets, a Romney victory could lead to some upward pressure on yields (as well as on the greenback) given the possibility of him replacing [Federal Reserve Chairman Ben] Bernanke (in early 2014) with a more hawkish policy maker."

In Greece, politicians are preparing to vote Wednesday on a fresh round of billions in austerity measures, from cuts to higher taxes, followed by a second vote on the weekend.

Greece is deep in recession, and unemployment, at about 25 per cent is intolerable.

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Events in Greece are a frequent flash point for investors amid ongoing questions of whether Athens can remain in the 17-member euro zone.

"Markets are taking risk off the table with major European equity indices selling off and safe haven bond markets and the [U.S. dollar] bid to start the week while North American equity futures are pointing to a flat open," said Derek Holt and Dov Zigler of Bank of Nova Scotia.

"The catalyst is probably not a fairly uneventful G20 meeting over the weekend, but rather soft earnings out of a global bank early in the European trading session today and uncertainty over a key vote due to take place in Greece on Wednesday as the government tries to ram through austerity measures that are strong enough to placate Greece's creditors and yet somehow palatable to a coalition government that was largely elected on anti-austerity platforms. Of course there's the matter of U.S. elections tomorrow."

How it might play out in currency markets
Senior currency strategist Camilla Sutton believes the probable impact from the election on the U.S. dollar is short-term strength that "fades" as the year winds down. Among the most significant risks in currency markets, according to Ms. Sutton:

On the fiscal cliff: A "split outcome" would probably lead to uncertainty and a short-lived period of U.S. dollar strength. "However, it is not a medium-term driver and January is likely to bring at least some political compromise in order to avoid the 4-per-cent on GDP that the cliff implies."

On the Federal Reserve: A Republican win would probably see Ben Bernanke replaced in January 2014 by a "far less dovish" chairman, one who probably wouldn't pursue policies like quantitative easing.

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On China: While Mitt Romney has pledged to tag China as a "currency manipulator," which would spark a trade battle, Scotiabank does not expect Beijing to be labelled as such given that its current account surplus has narrowed, growth in foreign exchange reserves has slowed, and the yuan has been allowed to rise.

CMHC sees sales dip
Canada's government mortgage insurer expects ongoing moderation in the market for new homes in the last quarter of this year and into next, while the resale market holds its pace.

Canada Mortgage and Housing Corp. projects the year will close out with construction started on between 210,800 to 216,000 units. Housing starts will drop next year to between 177,300 and 209,9000, it said today.

CMHC expects resales will range from 449,200 to 465,600 this year, and 433,300 to 489,700 in 2013.

Average prices will range from $363,200 and $367,000 in 2012, and $363,100 and $377,900 next year. Its so-called point forecast suggests a price rise of 0.2 per cent this  year, and 1.5 per cent in 2013.

"A weaker outlook for global economic conditions and the waning of the effect of pre-sales from late 2010 and early 2011, which contributed to support multi-family starts this year, will bring moderation in housing starts next year," said the agency's deputy chief economist, Mathieu Laberge.

"Nevertheless, employment growth and net migration will help support housing starts activity going forward."

Separately today, Statistics Canada reported a drop of more than 13 per cent in the value of building permits in August, though that was driven largely by losses in the non-residential sector of almost 31 per cent. Permits can be exceptionally volatile.

Where residential housing is concerned, permits rose by 0.4 per cent, after two months in a row of declines, though that was on the back of permits for detached homes, while those for condos fell.

"On the year, residential permits remain up 19 per cent, highlighting the booming homebuilding sector that continues to thrive under a low-rate environment," said Emanuella Enenajor of CIBC World Markets.

Toyota raises forecast
Toyota Motor Corp. is raising its financial outlook even in the face of its troubles in China, where a consumer backlash is hitting Japanese companies, and a strong currency.

The auto maker today posted a quarterly profit of almost ¥258-billion, or more than $3-billion (U.S.), up from more than ¥80.4-billion a year earlier.

It also boosted its profit projection for the full year, which ends next March, to ¥780-billion from ¥760-billion. At the same time, however, it cut its forecast for vehicle sales by 50,000, to 8.75 million from 8.8 million "due to uncertainties in the Chinese and European market environments."

The company gave a nod to the strong yen, and the impact of the China-Japan spat over some uninhabited islands.

"Although currency fluctuations have continued to affect our profits and the effect of current Japan-China relations on our sales is still unclear, we have revised the forecast we announced at the end of the first quarter to reflect the progress we have been making in our profit improvement activities," said executive vice-president Satoshi Ozawa, citing, among other factors, government stimulus measures around the world.

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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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