Weekly Review

Gloom and Doom

Certainly this has not been a fun week for most markets around the world.  Many companies came out missing target estimates reaffirming the fact that the economy is far away from a real recovery. The UK shocked the markets when the latest GDP numbers from the Office for National Statistics showed that the economy shrank by 0.7% over the second quarter. 

USA
The US economy expanded at a rate of 1.9% the first quarter.  Numbers just came out today indicating that the economy grew at a slower pace of 1.5% for the second quarter from April to June.  The economy slowed amid weak consumer spending, government cuts and a rise in imports from foreign countries.  Weak confidence in the Euro currency has led to capital flight into the American dollar thereby pushing up its value.  With a stronger US dollar exports have become less attractive which in turn is hurting local manufacturers export their products.
Bush tax cuts are set to expire be the end of 2012 (Fiscal Cliff).  Most economist predict that if all of the 2012 tax and spending cut measures occur under current law, it would reduce the deficit but also drag down GDP by 4% or more and cause a recession next year.

EU

European Central Bank President Mario Draghi pledged on Thursday to do whatever was necessary to protect the euro zone from collapse, sending a strong signal that inflated Spanish and Italian borrowing costs were in his sights.  Spain's 10-year bond yield sank to as low as 6.92%, around 40 basis points lower.  Furthermore, the news reversed the 5 day decline of the Euro/USD.  The Euro made significant gains.

Italy also came into the spotlight as the provincial government association (UPI) warned that schools may not be able to open after the summer holidays due to planned spending cuts and local finances. These comments proceeded prime minister Mario Monti's comments last week announcing that Sicily was on the brink of default and on the same day the press stated that 10 Italian cities faced serious financial difficulties.
  
Citigroup said there’s now a 90 percent chance Greece will leave the euro in the next 12 months to 18 months.



 

China

China National Offshore Oil Corp.(CNOOC) — is a state-owned oil company.
Calgary-based oil and gas firm Nexen Inc. has agreed to be acquired by CNOOC Oil Company in a $15.1 billion US cash deal. It will pay $27.50 per Nexen share. That price makes the deal the largest foreign transaction that Beijing has ever attempted.

The New York senator, a noted opponent of China's international trade policies, told U.S. Treasury Secretary Timothy Geithner that the U.S. should block the takeover of Calgary-based Nexen unless China lives up to its free trade commitment.

With stronger Canadian/Chinese trade relations and uncertainty in middle eastern oil we can expect to see more M&A activity in the Canadian energy markets.

Herman Venegas

Weekly Review

 

What a week!  Looks like the major central banks fired some bullets with the intent to fuel the economy.  Lets take a further look into specific regions...........

China
This is the second time in a month (second time in four years!)  that the Peoples bank of China have cut interest rates.  One year lending rate decreased 31basis points and one year deposit rates dropped 25 basis points. 
The effects were felt immediately! Chinese property shares rose the the most in four months.  The Shanghai Composite Index added 350basis points.  Companies like China Vanke and Poly Real Estate Group benefited from this despite governments restriction on the property market.  Lets keep in mind that Chinese rates are currently sitting at 6% which gives them lots of fire power.

Eurozone
ECB president Mario Draghi adopted Bernanke style Economics by cutting the Benchmark rate to a Record Low of 0.75% and the overnight deposit rate to 0!  Unlike China's 6%, the ECB doesn't have much fire power left and will eventually fall into a liquidity trap. 
How have the European markets responded?...............Not Good!.  Despite the the rate cut and the EU plans to recapitalise the banks, Spanish yields are back up to 6.95% from 6.25% earlier this week (7% is very likely a tipping point).  There's not much the ECB can do now without some sort of Fiscal unity.  I say lock the EU leaders up in a cabin somewhere in the Alpes and don't let them out until they reach an agreement. 
Will the Euro Zone break up?...............  Roger Bootle thinks so, he is managing director at Capital Economics Ltd and talks about the outlook for the euro zone, central bank rate cuts and monetary stimulus. Bootle recently won the Wolfson Economics Prize for proposing a contingency plan for the breakup of the euro. 

England
Recovering from the Rupert Murdoch scandal of last year, England was hit with another one.  The Bank of England has been drawn into the scandal over Barclays Plc's rigging of LIBOR rates.  Nonetheless, the Bank of England raised its target for bond purchases by 50billion pounds to stimulate the economy.  The Bank has grown particularly concerned that rising borrowing costs could trigger defaults that cause bank losses to mount, setting off “an adverse feedback loop” that would weigh on economic growth and threaten the health of the financial system as a whole. Barclays is the most exposed of all UK lenders to the eurozone periphery, with loan and sovereign debt exposures equivalent to 170% of its entire equity capital. Royal Bank of Scotland also has dangerously large total exposures to the region.

US
After the FOMC and the extension of Operation Twist on June 20th we saw positive signs in the economy.  Home sales rose the most since April 2010 and the markets showed some signs of improvements.  But what's really happening? In the last month, two municipalities of California, Stockton and Mammoth Lakes filed for Bankruptcy.  A bad economy, housing problems and unfunded pension obligations seems to be the root cause of the problem. 
Just look the numbers! official data showed firms had created only 80,000 new jobs in June, leaving the jobless rate unchanged at 8.2%.  Job creation remains below the 100,000 judged necessary by the Federal Reserve for a stable job market, according to the US Labour Department.
So what will the Fed's do now?  Do I smell QE3?  TD economists tend to think so placing the odds of a third round of quantitative easing at  a relatively high possibility!