Weekly Update - September 17, 2012

What a week it was, big announcements from the fed, geo-political tensions grow, and Apple announces its long anticipated iPhone 5

Want to take a closer look? Let’s go!

Step right up folks; Get your stimulus, this one’s going to be big!

First and foremost the biggest news this week was Federal Reserve Chairman Ben Bernanke’s announcement of another attempt at stimulating the sluggish American economy, QE3 (the 3rd Quantitative Easing):

Like a toddler on Christmas day, markets have been anxiously anticipating the full details of QE3. Here’s what QE3 entails:

Open market purchases of mortgage backed securities at a rate of $40 Billion per month... Indefinitely! (well, to be clear, until the jobs markets improve substantially as long as inflation stays contained)

Here’s a part of the official Fed. statement:

“If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,”

The Fed. also hinted at keep rates (which are already near rock bottom) unchanged until at least mid-2015. Pushing back earlier promises to keep rates unchanged till 2014. Yikes...

Market results for the week:

·        US equities gained on the news of QE3

·        The dollar fell broadly

·        Oil prices rose and gold hit a 6-month high

Although, the key metric from QE3 is yet to be determined... INFLATION! For a more in-depth analysis of QE3-inflation risk and how to keep your investments safe & sound, take a look at the below article:

http://investomax.blogspot.ca/2012/09/inflation-is-always-and-everywhere.html

Dispute over Pacific Islands leads to violence and harms Chinese-Japanese Business relationship:

Oh my, this does not look good. Asia’s two largest economies are amidst a heated territorial battle over Diaoyu/Senkaku islands which is leading to violent attacks on businesses.

What’s this all about? In a nutshell, Japan claims to have purchased these islands for nearly $30 million dollars, China simply does not recognize this purchase and says Japan is stealing these Islands from them. Now there we’re all caught up to speed, let’s talk about what’s happening to business between the nations which last year generated two-way trade of $345 billion.

·        Both Toyota and Honda have claimed that arsonists have badly damaged plants in China. Honda has halted production in China for two days – other car makers have followed as well in halting production in China including Mazda and partner Ford

·        Seven & I Holdings, is said to close 13 Ito Yokado supermarkets and 198 “7-11” convenience stores in China on Tuesday following the violent attacks

·        Tech giants like Panasonic have halted production facilities in China (following an alleged sabotage by Chinese workers), same goes for Cannon and Sony has discouraged all non-essential travel to China

Let’s hope this issue reaches a conclusion soon and business returns to normal. For now though, keep an eye on Japanese depository receipts traded in China and expect sharp loses.

Is it really here?

Yes it is! The moment many geeks and Apple loyalists have been waiting for has finally arrived. The iPhone 5 is here!

And it’s taller than ever! This is big news for the economy as a whole as the iPhone has some quite astonishing affects on GDP; take a look at what some economists are saying about it:

·        The iPhone 5 could inject $3.2 billion to the U.S. economy in the fourth quarter or $12.8 billion at an annual rate

·        0.33-percentage-point boost to GDP

With pre-orders hitting a record high of 2-million units, Apple could be well on it’s to reaching these estimates and further continuing its super-growth phase

That’s all for this week folks, stay tuned for more

                                                                                         

Matthew MacMull

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!