July 20, 2011 Newsletter
Dear Friends,
“If you have built castles in the air…
Your work need not be lost…
That is where they should be…
Now put foundations under them…”
-Henry David Thoreau
Photo of The Day:
Cyclists compete in the final leg of the 2011 Tour De France Championship (REUTERS)
Market Commentary
Canada
Canada’s dollar advanced to the highest since May 2 against its U.S. counterpart on speculation the central bank will raise its benchmark rate from 1 percent as soon as September amid quickening inflation.
The loonie, as the currency is also known, approached a three and a half-year high, as optimism that policy makers in Europe and the U.S. will address debt conflicts drove demand for higher-yielding assets. Bank of Canada Governor Mark Carney reiterated in a statement today that monetary stimulus will be withdrawn.
“The reality is that 1 percent is not a sustainable rate,” Firas Askari, head currency trader at Bank of Montreal’s BMO Capital unit, said by phone from Toronto. “It’s an emergency, accommodative rate, and Canada is not in a position that it requires this any further. The inflation numbers are concerning. In my mind there’s a high likelihood of a rate hike, if not two, by the end of this calendar year.”
The Canadian currency gained 0.3 percent to 94.77 cents per U.S. dollar at 3:49 p.m. in Toronto, compared with 95.01 cents yesterday. It touched 94.57, close to the 94.46 it reached on April 29, the strongest since November 2007. One Canadian dollar buys $1.0552.
Less Stimulus
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” Carney said in opening remarks to today’s press conference after the release of the quarterly monetary policy report.
Yields on two-year Government of Canada bonds rose four basis points to 1.52 percent. The securities yielded 115 basis points more than equivalent-maturity Treasuries, from 102 basis points before the Bank of Canada statement. The spread was as wide this year as 121 basis points in January.
Today’s statement echoed another made yesterday when the central bank maintained its target rate for overnight loans between commercial banks at 1 percent, where it’s been since September. Previous statements had used the word “eventually” to describe the timing of rate increases.
Rate Signal
“The market’s initial take on the bank announcement yesterday was that the removal of the word eventually signaled some sort of intent,” Shane Enright, executive director at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto. “What the time frame on that is, who knows, but obviously it was taken out for a reason.”
Enright predicted the Canadian dollar could appreciate beyond the highs of 94.46 cents seen in April.
“With the perception of our shift on the bank’s monetary policy outlook, I think the loonie can see 92 cents by the end of the summer,” BMO’s Askari said.
Inflation will average 2.8 percent between July and September and slow to 1.9 percent in the second quarter of next year, the Ottawa-based central bank said in its Monetary Policy report today. The so-called core rate, which excludes eight volatile items, will peak at 2.1 percent in the first quarter of 2012.
“We still think early 2012 before the Bank of Canada tightens,” Shaun Osborne, chief currency strategist at Toronto- Dominion Bank, said in an e-mail. He predicted the Canadian dollar will depreciate to parity by year-end.
Europe’s Bonds
Spanish and Italian bond yields fell a second day before a summit tomorrow of European officials. The Dollar Index dropped after President Barack Obama praised a bipartisan Senate proposal yesterday for a $3.7 trillion debt-cutting plan as U.S. lawmakers intensify efforts for a compromise on government spending less than two weeks before a threatened default.
“Even if we do have a few headlines which appease investors and calm the bonds markets in the short term, then we should see a bit of a risk rally,” said UBS’s Walker.
Canadian wholesale sales increased 1.9 percent to C$47.6 billion ($50 billion) in May, the fastest rate in 18 months as sales of agricultural supplies and farm equipment surged, Statistics Canada said. Economists predicted sales would rise 0.1 percent, the median of 15 responses compiled by Bloomberg News.
“It was a big beat on wholesale sales in May and it should add to the optimism,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “Canada’s dollar is further supported by the global risk backdrop, which is pointing decidedly higher.”
Chris Fournier (Bloomberg)
US
U.S. stocks fell, a day after the best rally since March for the Standard & Poor’s 500 Index, as concern the government will fail to increase the debt limit overshadowed higher-than-estimated earnings at United Technologies Corp. lost 1.8 percent as Boeing Co. picked a rival engine maker to upgrade its 737 jet. Yahoo! Inc., Altria Group Inc. and Johnson Controls Inc. lost at least 2.4 percent as results disappointed investors. Apple jumped 2.7 percent after record sales of iPads and iPhones lifted profit, helping the company join 89 percent of S&P 500 members topping estimates so far in the earnings season.
The S&P 500 slipped 0.1 percent to 1,325.84 at 4 p.m. in New York after the yesterday surging 1.6 percent as President Barack Obama endorsed a bipartisan deficit-reduction plan from the so-called Gang of Six senators. The Dow Jones Industrial Average decreased 15.36 points, or 0.1 percent, to 12,572.06 after surging 202 points yesterday in its biggest gain of 2011.
“There have been a couple of companies that have had some nice beats,” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., which oversees about $80 billion, said in a telephone interview. “But the macro environment is weighing on things and people are still worried about the U.S. debt situation.”
The S&P 500 has declined 2.8 percent from a three-year high in April amid speculation the sovereign debt crisis in Europe is spreading across the region and concern U.S. lawmakers will fail to reach a deal on raising the debt limit before the Aug. 2 deadline.
Deficit Talks
The proposal for a $3.7 trillion debt-cutting plan praised by Obama is facing resistance from House Republicans, as lawmakers intensify efforts for a compromise on government spending less than two weeks before a threatened default. Obama plans to renew talks at the White House this week with congressional leaders as the Democratic-led Senate and Republican House pursue divergent paths toward ending the stalemate.
Blackstone Group LP’s Byron Wien said today in an interview on Bloomberg Radio that investors in the stock market do believe U.S. lawmakers will reach a deal on raising the nation’s debt limit as the likelihood that tax increases will be part of the plan increases.
“There’s a residual feeling on the part of investors that somehow this will be solved,” said Wien, the vice chairman of Blackstone Advisory Partners, whose parent, New York-based Blackstone Group LP, is the world’s largest private-equity firm. “The point that the market was so excited about yesterday was that since it was a bipartisan group of six there was a possibility there could be revenue increases in addition to spending cuts – that’s key to getting an agreement.”
Inyoung Hwang (Bloomberg)
Have a wonderful evening everyone!
As Always,
Kyle, for Carolann.