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Markets sink as Europe pact seen as just 'sound and fury'

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Here we go again The market rally tied to Europe's new debt plan didn't last long.

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European and North American markets sank today as the bloom comes off the rose from Friday's summit, where most governments agreed to a new fiscal plan aimed at imposing discipline on the budgets of the euro zone.

"European leaders might have hoped that the market would respond well to the decisions reached in Brussels on Friday, but any positive feeling has not lasted beyond the journey into work," said analyst Chris Beauchamp of IG Index.

"As investors look at what was actually decided, the general opinion is that all the sound and fury from Friday signifies very little," he said in a research note today.

"Politicians and markets might disagree on whether this is a liquidity or a solvency crisis, but we know for certain that Europe is going through a crisis of confidence. The outlook for the euro is hardly any better than it was on Friday, and there is the dangerous prospect that bond vigilantes will use the two weeks before Christmas to try and pick on one of the countries currently close to bailout territory."

Stock investors had been buoyed on Friday, but today are taking a sober second look. And while Italy pulled off a successful debt auction, with yields below last month's record, the rate was still high at 5.92 per cent, signifying bond markets still aren't satisfied.

"Markets are shedding risks into the North American open as it becomes increasingly clear that any solution to Europe will not be an easy fix," said Scotia Capital's senior currency strategist Camilla Sutton.

Tokyo's Nikkei gained 1.4 per cent, though Hong Kong's Hang Seng slipped 0.1 per cent and Europe's major exchanges were down. The S&P 500 and Toronto's S&P/TSX composite also slipped. North American markets were also pushed down by a revenue warning from Intel Corp.

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Markets have become all too aware that Friday's agreement, which Britain didn't want anything to do with as it decided to stay out and instead protect its financial services hub, is aimed at bringing budget deficits into line on a longer-term basis, but offers little in the way of measures to ease the debt crisis now.

"The bottom line to all this 'noise' is whether or not Friday's agreement was or is a 'lousy compromise,'" said CMC Markets analyst Michael Hewson.

"First glance suggests, that is exactly what it is, and the only new measure agreed was the promise of €200-billion of bilateral loans to the IMF to be used to rescue Italy, if needed," he said in a research note.

"The one changed dynamic is the isolation of Britain from the other 26 European nations as they pledge to try and pursue further fiscal harmonization, outside of the strictures of the original treaty. How long that will last is anyone's guess, and as such we could see further unravelling with respect to this agreement in the coming weeks."

Germany's Angela Merkel and France's Nicolas Sarkozy had wanted all 27 countries of the wider EU to agree to treaty changes that would penalize countries for missing the debt-to-GDP ratio of 3 per cent. It's not that that rule is new, it's that several countries have ignored it in the past, including Germany.

Britain nixed the decision, leaving the new fiscal compact to the smaller group of 17 nations that share the euro and several others that still want to be part of it. But this has yet to play its course.

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"It is hard to imagine that Ireland will give up its 12.5 per cent corporation tax rate, and one can't imagine Finland or Sweden being able to overcome their misgivings either, with the prospect of referendums being required," Mr. Hewson said.

"As such the U.K. may not be isolated for long, despite the political mumblings to the contrary by various politicians past and present, with a lot of colourful metaphors being bandied about the U.K.'s fate; however that will be the least of anyone's problems if the euro breaks up," Mr. Hewson said, adding a warning on the potential fallout.

"The reality is, due to the reluctance of Merkel and Sarkozy to show real leadership and deal with the real issues, and instead marginalize Britain to pursue a political agenda, the probability of a breakup still remains a possible outcome," he said.

For his part, Mr. Cameron stressed today that Britain is a member of the EU, and nothing at the summit changes that.

"Our membership of the EU is vital to our national interest," he said. "We are a trading nation and we need the single market for trade, investment and jobs."

Standard & Poor's has already warned that it could downgrade almost the entire euro zone, and is expected to carry through on at least part of that despite the outcome of Friday's summit. Moody's Investor Service is also reviewing its ratings.

Indeed, its chief economists warned again today that time is fast running out. While the summit measures were significant, said Jean-Michel Six, the results still fall short.

"Recall that S&P stated that ratings could be lowered by up to one notch for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other sovereigns," said RBC currency strategist Elsa Lignos in London. "That would then trigger knock-on downgrades for European banks."

Tensions, too, are rising among the governments involved. Mr. Sarkozy, for example, said in an interview with Le Monde that he and Ms. Merkel had done their best to force Britain's David Cameron into the pact. Instead, there is now a divided Europe.

"There are now clearly two Europes," Mr. Sarkozy said. "One wants more solidarity between its members and more regulation. The other is attached only to the logic of the single market."

Overall, the summit appears to have achieved little in the way of easing the concerns over the 17-member monetary union.

"When all is said and done, this was another underachieving summit," said Kit Juckes, the chief of foreign exchange for Société Générale.

"Friday's positive initial reaction to the news that the euro zone economies (and the rest of the EU bar the U.K.) were in agreement to create a new set of binding fiscal rules, has been replaced by despondency," he said.

Debt troubles in the wake of the recession, of course, are not isolated to the euro zone. The Financial Times reports today, for example, that the Organization for Economic Co-operation and Development will release a report today that warns borrowing among industrialized nations this year has topped the $10-trillion (U.S.) market, and will climb further still next year.

Carney warns on spending You know consumer debt levels are bad when ...

1. In an era of emergency low interest rates and a strong banking sector, household debt has climbed a further 13 percentage points relative to income since 2008.

2. Canadians are deeper in debt that either the Americans or the British.

3. The bulk of the proceeds capital inflows has gone to household spending.

4. Canadian households would have to cut their net financing needs by about $37-billion a year to kill off their net financial deficit, which, over two years, would require either an added 3 percentage points of growth in exports, 4 points added to government spending, or 7 points to business investment.

5. Canadian policy makers are working together to monitor the financial situation of Canadians.

6. Mark Carney invokes the Toronto Maple Leafs and their history with the Stanley Cup to prove his point.

These were all points made today by the Bank of Canada governor in a luncheon speech in Toronto, where Mr. Carney pointed out how Canada has distinguished itself on the government debt front, as other countries face ruin, but warned about debt-fuelled consumer spending.

"Over the past 20 years, our non-financial debt increased less than any other G7 country," Mr. Carney said, The Globe and Mail's Jeremy Torobin reports.

"In particular, government indebtedness fell sharply, and corporate leverage is currently at a record low," he said in the text of the speech.

"In the run-up to the crisis, Canada's historically large reliance on foreign financing was also reduced to such an extent that our net external indebtedness was virtually eliminated. Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup."

(That was 1967, by the way.)

Even as foreign investors snap up Canadian bonds, too much of the capital coming in is being used to fund household spending instead of building productive capacity, he said.

Encana fights back Encana Corp. is pushing back forcefully against an Environmental Protection Agency report that links contaminated drinking water to "fracking" at one of the Canadian company's natural gas fields in Wyoming.

The EPA said last week that found contaminants in the water and that its findings indicate "likiely impact to groundwater that can be explained by hydraulic fracturing," the drilling practice commonly referred to as fracking.

But in a statement today, Calgary-based Encana said it "strongly disagrees" with the preliminary conclusions of the report on the Pavillion field, and it is demand a review by a qualified third party, The Globe and Mail's Nathan VanderKlippe reports.

Citing several discrepancies, Encana uses particularly harsh language, saying it does not believe the EPA put any of its findings to a "qualified, truly independent" third party.

"The EPA's data from existing domestic water wells aligns with all previous testing done by Encana in the area and shows no impacts from oil and gas development," the company said.

"Of most concern, many of the EPA's findings from its recent deep monitoring wells, including those related to any potential connection between hydraulic fracturing and Pavillion groundwater quality, are conjecture, not factual and only serve to trigger undue alarm," it added in its statement.

"... Conclusions drawn by the EPA are irresponsible given the limited number of sampling events on the EPA deep wells and the number of anomalies seen in the data."

CIBC cuts Suncor target Canadian Imperial Bank of Commerce is taking a slightly dimmer view of shares in Canada's Suncor Energy Inc. after the energy giant's announcement yesterday that it's suspending production in Syria to be onside with sanctions.

Suncor has about 100 people in Syria, which represents about 3 per cent of its total production.

Analyst Andrew Potter trimmed his price target on Suncor shares to $45 from $46.

"Although Suncor has not highlighted insurance coverage, we believe the company could be eligible for another $400-million million claim, which could mitigate the impact on our estimates," said Mr. Potter. "We have not included insurance proceeds or the ramp-up of Libyan production in our estimates."

Still, he said, Suncor "offers one of the best growth profiles" despite the troubles in Syria, where clashes continue today.

Intel cuts outlook Intel Corp. has cut its fourth-quarter revenue outlook because of shortages of hard drives, largely related to the flooding in Thailand.

The computer chip giant said today it now expects revenue in the area of $13.7-billion (U.S.), down from its earlier forecast of $14.7-billion. (The new forecast is plus or minus $300-million, the earlier projection plus or minus $500-million.)

"Sales of personal computers are expected to be up sequentially in the fourth quarter," the California-based company said in a statement.

"However, the worldwide PC supply chain is reducing inventories and microprocessor purchases as a result of hard disk drive supply shortages. The company expects hard disk drive supply shortages to continue into the first quarter, followed by a rebuilding of microprocessor inventories as supplies of hard disk drives recover during the first half of 2012."

Intel said it also now projects its margin in the fourth quarter to be about 64.5 per cent, compared to an earlier 65 per cent.

Markets await RIM Markets have their eye on Research In Motion Ltd. this week as the BlackBerry maker prepares to report third-quarter results on Thursday.

RIM has already set the stage for its earnings report on Thursday, having unveiled dual hits from inventory of its PlayBook and the great BlackBerry outage earlier this year. As Iain Marlow writes in today's Report on Business, RIM may already have softened the reaction with its Dec. 2 announcement.

RIM has said it is committed to the PlayBook, whose prices have been slashed in the run-up to the holiday season, though it announced it wouldn't meet its earnings targets for the year.

RIM plans a $485-million (U.S.) hit related to the inventory of the PlayBook, in addition to the hit of $50-million related to the blackout. Excluding those two, RIM has said it expects adjusted earnings per share to come in at the "low to mid point" of the $1.20 to $1.40 it had earlier projected.

RBC Dominion Securities analyst Mike Abramsky has said he also expects "soft" guidance for the fourth quarter.

Today, UBS Securities Canada analysts Phillip Huang and Amitabh Passi warned in a report that the "status quo may no longer bee good enough" at RIM, whose stock price has taken an absolute battering this year.

"With RIMM's recent negative pre-announcement and 70-per-cent loss in market cap year-to-date, we believe the stakes for RIMM have never been higher and for the board to make a bold move that may include i) leadership change ii) strategy change, and/or iii) M&A," the UBS analysts said, referring to RIM by its U.S. stock symbol.

"If timely and swift action is taken RIMM may still extract $25+/share; otherwise we fear shares could head towards tangible book value of $10-12/share."

Many analysts have slashed their price targets on RIM shares since the company's earnings warning, and some have a bleaker outlook than others. The UBS analysts said RIM needs "bold action" and "tough decisions."

Sun Life unveils plan The new chief executive officer of Canada's Sun Life Financial Inc. is taking the insurer in a new direction, The Globe and Mail's Tara Perkins reports today.

The company will end variable annuity and individual life products in the United States at the end of this year, Dean Connor says, as today "begins a new chapter in the history of Sun Life Financial."

Sun Life will continue to sell products with lower capital requirements in the U.S., including employee benefits products and mutual funds.

"We view the announcement by Sun as a positive development for several reasons: (1) it provides better metrics around which investors can anticipate dividend policy, with increased visibility now that the current dividend can be maintained; (2) the decision to curtail sales and to refocus its U.S. business appears to be a sensible decision strategically, given the greater capital they require in Canada and the high earnings volatility they produce under [international financial reporting standards] and (3) we get a sense of greater urgency at Sun Life than we have seen in the past," said analyst Michael Goldberg of Desjardins.

Analyst Peter Rozenberg of UBS Securities Canada said the move should reduce sensitivity to interest rates and stock, while improving the allocation of capital and boosting its growth and returns long-term.

Mr. Rozenberg changed his 12-month rating on Sun Life shares to "buy" from "neutral, and cut his 12-month price target to $22 from $25.

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