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Rout in commodities markets sinks Canadian dollar, stocks

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Commodities, dollar sink Oil and other commodities sank today, pushed down by economic jitters and questions about just how high prices had climbed, and dragging the Canadian dollar and the S&P/TSX composite index along for the ride.

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The loonie lost more than a penny, closing at $1.0328 U.S.

"Most risk-based assets have had a difficult week," said Scotia Capital currency strategist Camilla Sutton.

"We are in the midst of a retracement, but have yet to break important support levels. Until we break these levels we view current market action as a healthy period of rest; however a break through support would imply that the shift in markets is likely to become more aggressive and could last into quarter end."

Oil prices plunged to below $100 (U.S.) a barrel, losing about 10 per cent.

Silver , gold andcopper , oil and other commodities all suffered. Silver, in particular, has lost its shine after climbing sharply.

"Overnight fundamentals shocked generally to the downside of market expectations and fed worries about near-term global growth," said Scotia Capital economists Karen Cordes Woods and Derek Holt.

"When combined with disappointing earnings that hit European financials, the impact was to sweep risk appetite off the table onto the floor. A steep plunge in German factory orders, disappointing U.K. manufacturing data, a drop in Australian retail sales, and more Asian central bank policy tightening add to broadening global evidence of a potentially nasty downward shock."

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Avery Shenfeld, the chief economist at CIBC World Markets, said he sees the drop in commodities tied to fundamentals.

"We view the pullback in commodities as fundamentally based, although obviously enhanced by investor flows, the latter explaining why goods as diverse as cotton and copper have moved together," Mr. Shenfeld said.

"The fundamental side of the story may come from markets paying closer attention to the potential growth impacts of monetary tightening in emerging markets, the latest being a rate hike in India this week. China and Brazil, two other [emerging market]powerhouses, also are only part way through a tightening cycle. That, coupled with fiscal tightening across a broad range of developed economies, could have investors second guessing how far they had bid up a range of raw material prices."

Auto makers rebound Detroit's auto makers continue to stage a powerful comeback from the crisis.

General Motors Co. today posted a first-quarter profit of $3.2-billion (U.S.), or $1.77 a share, diluted, up from $865-million or 55 cents a year earlier. Revenue climbed to $36.2-billion from $31.5-billion.

That's triple the profit of a year earlier, the result of both higher sales but also because of the sale of certain assets, and marks the fifth straight quarter of profitable results.

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On Monday, Chrysler Group LLC posted its first quarterly profit since filing for bankruptcy protection, rebounding to a profit of $116-million from a loss of $197-million on stronger sales.

And late last month, Ford Motor Co. , alone among the Detroit Three in staying out of court protection, reported its best first-quarter showing in more than a decade, with a profit gain of 22 per cent, to $2.6-billion, and revenue increases of 18 per cent, to $33.1-billion.

"As the economic recovery enters its third year, a particularly good news story has been the recent revival of the North American auto sector," economists Derek Burleton and Shahrzad Mobasher Fard of Toronto-Dominion Bank said in a report today.

"Despite the brakes applied by high gasoline prices and this year's Japanese earthquake, continent-wide sales and production remain on track to register a second consecutive double-digit gain in 2011. And while rates of expansion can naturally be expected to taper off as a recovery becomes more firmly entrenched, the positive momentum behind sales and production is likely to carry over into 2012."

The TD economists cited a more optimistic sales outlook in the United States and Mexico, though less so in Canada since the crisis did not bite as deeply. The industry's rebound will help pump up the North American economy.

"Stemming in part from the recent resurgence of the Detroit Three brands, there has been a significant reduction in the share of North American demand satisfied from overseas sources over the past few years," they added.

"We expect this trend to continue over the 2011-12 period, delivering an added boost to North America's economy. By our calculation, the direct and ancillary benefits of the growing auto sector is likely to raise U.S. and Canadian GDP by about 1 percentage point this year and about half a percentage point next year. This economic injection should help to keep both economies on the recovery track."

(For TD's forecast, click here for infographic.)

Blockbuster Canada in receivership Blockbuster Canada Co. has been pushed into receivership by the movie studios it depends on for its new releases, months after its U.S. parent company filed for Chapter 11 bankruptcy protection and was sold to a satellite television operator.

The studios that provide the chain with its movies requested that the company be put into receivership Tuesday, and an Ontario Superior Court judge granted the request, The Globe and Mail's Steve Ladurantaye writes.

Europe holds rates steady Both the European Central Bank and the Bank of England held their key rates steady today, prompting a dip in the euro when ECB chief Jean-Claude Trichet gave no indication of where he might be headed.

The ECB held its benchmark rate at 1.25 per cent, and the Bank of England kept its rate at 0.5 per cent.

Some market players had expected Mr. Trichet to signal another rate increase next month, but he didn't, though he did warn again about inflation.

"It looks as though the ECB will hold policy steady in June, but nothing is guaranteed beyond then," said senior economist Benjamin Reitzes of BMO Nesbitt Burns.

"With inflation expected to remain above target for at least the next few months, we could see a rate hike as soon as July to counter price pressures. The ECB appears comfortable with a policy of one rate hike per quarter for now, similar to the prior tightening cycle which started in 2005. Look for the euro to rally as we move closer to the June meeting, as anticipation of 'strong vigilance' builds."

Manulife profit sinks Manulife Financial Corp. today posted a drop in first-quarter profit to $985-million or 53 cents a share, from $1.2-billion or 66 cents a year earlier. The results include a $151-million charge, already disclosed, related to the earthquake in Japan, The Globe and Mail's Tara Perkins reports today.

Manulife's profits this time last year had received a boost from rising stock markets. In the year since the insurer has been working to ramp up the hedges that it is putting in place to mitigate its exposure to stock markets.

It said today that roughly 59 to 65 per cent of its stock market exposure would be protected by hedges if markets dropped 10 per cent.

Telus hikes dividend Telus Corp. today boosted its dividend as it reported a jump in first-quarter profit to $328-million or $1.01 a share, up from $273-million or 85 cents a year earlier. Revenue rose 6.5 per cent to $2.5-billion, the Vancouver-based telecommunications company said today.

"These quarterly results demonstrate the success of TELUS' strategy for driving data growth in our wireless and wireline businesses and providing a leading range of services and products for consumers and businesses alike," said chief executive officer Darren Entwistle.

The company also hiked its quarterly dividend by 2.5 cents to 55 cents.

Air Canada signals higher fuel costs Air Canada narrowed its first-quarter loss to $19-million or 7 cents a share, diluted, from $112-million or 45 cents a year earlier. Its operating loss, the airline reported today, narrowed to $66-million from $136-million.

"I am pleased to report continued improvement during the first quarter of 2011, despite the significant increase in fuel prices year over year," said chief executive officer Calin Rovinescu, signalling higher costs ahead.

"In the quarter, we incurred over $120-million in additional fuel expense from the same quarter last year," he said in a statement.

"Based on expected jet fuel prices and system capacity, we estimate that these higher fuel prices will add approximately $800-million to our operating costs in 2011. While fully offsetting increased fuel prices poses a significant challenge for an international carrier, we are aggressively pursuing a number of initiatives including capacity adjustments, fare and fuel surcharge increases, where competitively feasible, and incremental cost reduction opportunities in an attempt to mitigate the impact on Air Canada's 2011 results."

Brookfield Office sees record leasing Brookfield Office Properties omarked its first quarter as a pure-play office company by reporting record leasing activity at its properties around the world, Globe and Mail real estate wrtier Steve Ladurantaye reports.

Funds from operations in the first quarter were $155-million, or 28 cents a share, compared to $133-million, or 25 cents a share a year ago.

Building permits surge The value of building permits in Canada surged more than 17 per cent in March to $6.8-billion, the highest since June 2007, Statistics Canada said today.

The gain was regional in nature, driven largely by Ontario, the federal agency said.

The value of residential permits rebounded after two straight months of falling, reaching the best level since March of last year. The value of permits in the non-residential sector slipped 0.4 per cent.

"The value of permits for multi-family dwellings more than doubled in March to $1.9-billion, following two consecutive monthly decreases," Statistics Canada said.

"The increase was mainly the result of higher construction intentions in eight provinces, led by Ontario, Quebec and Alberta. Municipalities issued $2.1-billion worth of permits for single-family dwellings in March, up 2.5 per cent from February. Higher construction intentions, particularly in Ontario and Alberta, offset declines in other provinces."

The straight up number, rather than the dollar-based amount, is key for building permits, which are notably volatile month to month.

"Nationally, municipalities approved 17,141 new dwellings in March, up 26.7 per cent from February," the agency said. "The increase came from multi-family dwellings, which rose 55.5 per cent to 10,469 units. The number of single-family dwellings declined 1.9 per cent to 6,672 units."

Multiple-unit dwellings such as condominiums are a "choppy category with less value added per unit," noted CIBC World Markets chief economist Avery Shenfeld.

"Note that residential permits are still 1.7 per cent lower than the year ago figure, while non-residential permits are up 30 per cent, consistent with our call for business construction to grow and homebuilding to tail off this year," he added.

Europe's woes Portugal now believes its economy will shrink about 2 per cent this year and next, weighed down by harsh austerity measures.

The measures are tied to the embattled country's bailout deal struck with the EU, the International Monetary Fund and the European Central Bank.

"We disagree with the tactic of lending more money to already over-borrowed governments," said Carl Weinberg, chief economist at High Frequency Economics. "... At some point, the charity will end. At that time, Portugal - and Greece and Ireland - will fail. These nations will then need to restructure even bigger cumulative borrowings than they would have had to deal with if they would only implement a multi-year restructuring now."

And here's an interesting one: According to Bloomberg News today, Greece is trying to help boost its economy through improved tourism, planning to cut ferry fares and launch a promotional campaign.

Tourism represents about one-fifth of Greek employment. And, yes, there are tremendous tourist sites throughout the country. But, given the frequency of strikes to protest austerity measures, who would consider planning a vacation there?

Analyst upbeat on Magna UBS Securities Canada has boosted its price target on shares of Magna International Inc. after the auto parts giant's better than expected earnings yesterday.

As Globe and Mail auto writer Greg Keenan reports, Magna posted a first-quarter profit of $322-million (U.S.) or $1.30 a share, and boosted its sales forecast for the year.

Analysts Tasneem Azim hiked her 12-month target to $70 from $64, and kept her rating unchanged at "buy," citing Magna's higher outlook for the year and the "solid beat" in yesterdays results.

In Personal Finance today

Before you shop for a mortgage, you should be aware of these recently implemented mortgage rules, which were designed to reduce leverage in the system and promote housing market stability in the country.

When loans are taken out to earn income, the taxman might give you a nice cost break - under certain circumstances. Tim Cestnick explains.

The U.S. housing collapse has caused people to question assumptions about home ownership that we in Canada still hold dear.

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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