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Stocks rally but beware 'these ridiculously bipolar markets'

These are stories Report on Business is following Monday, Nov. 19, 2012.

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Markets rally
Investors around the world drove stock prices sharply higher today, but analysts warned the "ridiculously bipolar markets" could turn on a dime.

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Or euro, as the case may be.

"After last week's bloodbath equities are stronger for a variety of reasons: Short covering, high hopes for Greek aid and optimism surrounding the fiscal cliff," said market analyst David Madden of IG in London.

Markets got off to a solid start in Tokyo, where the Nikkei gained 1.4 per cent, then gained in Europe, where the major exchanges climbed by between 2.4 per cent and 2.9 per cent.

North American investors took their cue, pushing up the S&P 500 by 2 per cent, the Dow Jones industrial average by 1.7 per cent and Toronto's S&P/TSX composite by 1.4 per cent.

Markets were driven by optimism over talks in the United States aimed at avoiding the so-called fiscal cliff, which refers to tax hikes and spending cuts that would automatically take effect Jan. 1 if no budget deal is reached.

President Barack Obama and congressional leaders all sounded the right note after talks on Friday, followed by hopeful comments by the President again on the weekend.

But caution should be the watchword as these talks progress. Remember, too, that questions remain surrounding Greece's future.

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"Markets have rallied strongly after President Obama and House Democratic Leader Nancy Pelosi expressed optimism that a deal can be reached to avert the fiscal cliff before the Jan. 1 deadline, but you'd hardly expect them to say anything else," said senior analyst Michael Hewson of CMC Markets in London.

Take today's rally with "a pinch of salt," Mr. Hewson said, noting that not much has actually changed since Friday, and the optimism could quickly fade.

"Such is the nature of these ridiculously bipolar markets," he added, recalling last week's declines.

There are also warnings on just how it all ends in the United States. As it now stands, running over the cliff is seen to hit the economy to the tune of more than $600-billion (U.S.).

Derek Holt of Bank of Nova Scotia said he believes a deal will be reached, but it won't be anything that's "kind to the economy or markets," and thus today's optimism is misplaced.

"I still think an agreement will be reached that avoids the most extreme aspects of the fiscal cliff, but not until the last minute following many theatrics over coming weeks that have yet to play out," he said.

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"An agreement that heads off the worst elements of the fiscal cliff by avoiding draconian sequestration cuts focused upon the defence lobby group is likely and that should rein in the over 4-per-cent hit to GDP that would have otherwise occurred," he added in a research note.

"That still means, however, that U.S. taxes will rise through what is a likely end to the payroll tax cut that will lead to a retrenchment in Q1 personal disposable income, and a rise in at least some personal tax rates. Those twin policy changes could well, in turn, likely lead to a retrenchment in consumer spending that will be bearish for company earnings reports, in my opinion."

In Europe, finance ministers are set to discuss Greece again tomorrow.

Last week, at a meeting in Brussels, they agreed to give Athens an extra two years to meet its fiscal targets, though put off a decision on the next tranche of bailout money. That's now scheduled to be decided tomorrow, and fresh in everyone's minds will be the public split last week between Luxembourg's Jean-Claude Juncker, the head of the finance ministers' group, and International Monetary Fund chief Christine Lagarde, who opposed the extension.

"The governments and the IMF will sit down again this week to try to put together a package, with the IMF balking at the latest euroland proposals because it views them as unsustainable," said chief economist Carl Weinberg of High Frequency Economics.

"So do we. Even if Greece's woes are contained this week, Spain continues to face a cloud of doubt over its ability to avoid [a bailout package that would break the rescue fund]," he said in a research note.

"The fate of Italy's government – and fiscal stability initiatives – is also in doubt. Risks are rising for year-end here."

In the end, said IG's Mr. Madden, Greece will get its funding after discussions among the so-called troika of lenders, the IMF, the EU and the European Central Bank.

"Everybody loves to buy cheap stocks but traders need the right motive and the likelihood of Greece receiving the next tranche of the bailout was the perfect excuse," he said.

"Members of the troika will argue among themselves about the terms of the deal for Greece, but when push comes to shove Athens will be given the money; it's hardly a monetary union if one member is allowed to go bust."

IMF highlights loonie
Buried in a recent International Monetary Fund report is a small paragraph with huge significance for the Canadian dollar.

The bottom line is that the IMF wants to break out the Canadian and Australian dollars when countries report their foreign exchange reserves.

Now, there are five key currencies in its report on the currency composition of official foreign exchange reserves, or COFER. The loonie, as the dollar coin is known in Canada, and the Australian currency are among the "others."

A recent IMF survey showed that the "overwhelming proportion" of reserves are still held in the five key currencies, the U.S. dollar, the euro, Japan's yen, Britain's sterling and the Swiss franc.

Then there are 10 "other" currencies.

"Of these currencies, only two – the Australian dollar (AUD) and the Canadian dollar (CAD) – had more than two countries report holdings of their currency, and these currencies are to be considered for inclusion in COFER reporting," the IMF document says.

"Any currency added to COFER reporting should meet the definition of a convertible currency that is freely usable for settlements of international transactions," it adds. "Staff intends to repeat the currency range survey in around three years."

The recommendation was made in August, and released late last week in an information notice.

What this means is that the two currencies are growing in importance as foreign exchange reserves climb.

Russia has started buying loonies, for example, while the Swiss National Bank says the Canadian currency now accounts for 4 per cent of its foreign exchange reserves.

"I think it just highlights how important Aussie and CAD have become," said senior currency strategist Camilla Sutton of Bank of Nova Scotia, referring to the Canadian currency by its symbol.

"We've seen this for a couple of years now."

Reserve managers, noted Ms. Sutton, are increasingly looking to diversify their holdings as their reserves swell, and "diversification is hard to find."

Both Canada and Australia are advanced economies, fuelled by commodities, both are rated triple-A, and both have developed bond markets, she added.

The move by the IMF will do nothing to affect the value of the already strong loonie, but it does suggest that the inflow of foreign money into Canada will continue, thus supporting the currency, she said.

And while the stronger loonie suggests Canadian tourists will have more buying power should they be travelling outside the country, it also spells more trouble for the nation's exporters.

BCE, Astral strike new deal
BCE Inc. and Astral Media Inc. have gone back to Canada's broadcast regulator with a new takeover deal they hope will win approval this time, The Globe and Mail's Steve Ladurantaye reports.

"We heard Canadians and the CRTC loud and clear - they want assurance that Astral joining with Bell Media will directly benefit consumers and creators," said BCE chief George Cope.

"We're ready to deliver more choice for listeners and viewers, more opportunity for content creators, and more competition for the broadcasting industry. Bell and Astral are happy to move forward with a new proposal that benefits all Canadians, in both official languages, in communities large and small across the nation, with new ideas, new funding and new choices."

BCE disclosed few details of the new agreement in a statement, though added it has withdrawn its request to the federal cabinet to direct the Canadian Radio-television and Telecommunications to support its proposed $3-billion takeover of Astral, which it rejected last time around.

"The new proposal to the CRTC by Astral and Bell addresses the commission's concerns and sets out the steps the companies would take to comply with the relevant viewership thresholds," the companies said.

"The proposal also includes a revised package of tangible benefits to support the creation of exceptional Canadian TV and radio content, promote homegrown talent in a multi-platform universe, and foster consumer engagement in the broadcasting system."

Hostess, union head to mediation
The Twinkie ain't over 'til it's over.

The judge supervising the Chapter 11 court protection proceedings of Hostess Brands Inc. has sent the Twinkie maker and its bakers' union to mediation in what is seen as a final attempt to save the company and its famous brands.

Hostess said on Friday it would liquidate and try to sell off brands such as Twinkies, Ding Dongs and Wonder Bread, having warned the union it would take such action if a week-old strike didn't end.

The judge in the case will reportedly serve as mediator tomorrow afternoon, having suggested Hostess and the Bakery Confectionery Tobacco Workers and Grain Millers International Union take the step.

"My desire to do this is prompted primarily by the potential loss of over 18,000 jobs as well as my belief that there is a possibility to resolve this matter," said Judge Robert Drain of the Southern District of New York, according to Reuters.

Affected are 33 bakeries, more than 550 distribution operations and 570 stores in the U.S.

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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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