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Bank of Canada cuts growth forecast as uncertainty mounts

The Bank of Canada is lowering its forecast for economic growth this year amid
disappointing export figures, weaker business investment both at home and in the United States and global uncertainty in the wake of Brexit.

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In the long run, stock market upheavals are a blip

In the long run, stock market upheavals are a blip


17:54 EST Sunday, Jun 26, 2016

In voting to leave the European Union, the British electorate sparked a dramatic and frightening trading day that, by some standards, will go down as one of the worst in history.

So certain was the financial world of the opposite referendum result that by the close of trading on Thursday, there was little if any concern evident in markets around the world.

Brexit explained: The latest updates and what you need to know

The reaction to Brexit was fierce and the losses staggering – more than $2-trillion (U.S.), according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. That figure ranks Friday’s global selloff as the costliest on record, in dollar terms, Mr. Silverblatt said. Never before had a single trading day’s damages exceeded the $2-trillion mark.

But as startling as that descent might be to investors, who may have found themselves materially poorer on paper as a result of Friday’s volatility, there is comfort to be taken in the market’s ability to quickly regain composure.

“Six months after these kinds of events, they’re a blip,” said David Baskin, president of Baskin Wealth Management. “Even Black Monday.”

On Monday, Oct. 19, 1987, stock markets around the world went into free-fall, with the S&P 500 index dropping by more than 20 per cent by the closing bell. By January, 1989, the index had regained what was lost on that day.

Geopolitical shocks, like the one Britain delivered last week, can generate profound uncertainty, to which markets have a knack for overreacting. But one important lesson to take from the history of such destabilizing events is this: This, too, shall pass.

Here is how the market reacted to major geopolitical events in recent history – how great the losses, and how quick the recovery.

August, 2011 – European debt crisis/U.S. debt ceiling debates

The threats to global confidence were brewing on several different fronts that summer. An impasse in the U.S. Congress through July had seen the country flirt with default on its debt over the failure to raise the debt ceiling. Relief over an agreement struck at the end of July was short-lived, as markets succumbed to an array of geopolitical fears, primarily the European debt crisis. Without a specific inciting event to blame, markets sold off sharply on Aug. 4. The next day, Standard & Poor’s downgraded U.S. sovereign debt for the first time ever, stripping the country of its top AAA rating. Those two trading days saw the S&P 500 decline by more than 11 per cent. While there were many chapters yet to come in Europe’s debt saga, officials there were at least able to temporarily quell the market frenzy through emergency funding and austerity plans. Meanwhile, political gridlock over U.S. government spending cleared up, and the S&P 500 returned to its previous highs within six months. Standard & Poor’s maintains a lowered AA+ rating on U.S. debt to this day.

Sept. 29, 2008 – U.S. bailout plan fails

The global banking system had already begun to freeze up and Lehman Brothers had already declared bankruptcy when the U.S. Congress defeated a $700-billion bailout package for financial institutions laden with toxic assets. The vote sparked global panic, with the S&P 500 index dropping by 9 per cent on that day alone. Over the following month, that benchmark’s losses would total a staggering 30 per cent. Within one week, then-president George W. Bush signed subsequent bailout legislation designed to take “troubled assets,” such as mortgage-backed securities, off the books of financial institutions, but what would amount to the worst financial crisis since the Great Depression would not reach its nadir for another six months. It would take more than two years for the market to return to its value prior to the Lehman bankruptcy.

Sept. 11, 2001 – Terrorist attacks

The horrifying revelation that the United States was under attack dawned before the stock market was set to ring the opening bell that morning. To prevent a potential market meltdown, the New York Stock Exchange and the Nasdaq were shut down for the rest of the week. The fear was still palpable when they opened for trading the following Monday morning, and the selloff that week was indeed one of the worst on record, as the S&P 500 index ended the week down by 12 per cent. While the political and economic consequences of 9/11 were very much unknown, calm was quickly restored in the stock market, as the main U.S. benchmark regained what was lost within one month.


At the open: TSX, Dow track European stocks lower on Brexit hangover

09:36 EST Monday, Jun 27, 2016

North American markets opened lower on Monday, tracking European stocks, as uncertainty over the impact of Britain leaving the European Union limited the appetite for risk.
The selloff on Friday eroded $2.08-trillion (U.S.) in market capitalization globally – the biggest one-day loss ever, according to Standard & Poor’s Dow Jones Indices, trumping the Lehman Brothers bankruptcy during the 2008 financial crisis.
In Toronto, the S&P TSX index was down 114.2 points, or 0.82 per cent, to 13,777.67 shortly after opening.
The Dow Jones industrial average was down 141.52 points, or 0.81 per cent, at 17,259.23, the S&P 500 15.22 points, or 0.75 per cent, at 2,022.19 and the Nasdaq Composite 43.33 points, or 0.92 per cent, at 4,664.65.
European stocks were hammered for a second day and the sterling fell more than 2 per cent. The European banks index on Monday hit its lowest since July 2012.
Faced with a second day of turmoil after Thursday’s referendum, which most in markets had thought would deliver a vote in favor of staying in the EU, investors sought safe havens such as the yen, gold and core government debt.
But moves were not as extreme as on Friday when stocks fell by their most in almost five years.
British finance minister George Osborne sought to reassure markets, saying the world’s fifth-largest economy was strong enough to cope with the Brexit-inspired volatility, but the positive impact on sterling was only fleeting.
“This Brexit decision has taken the markets by total surprise. I would remain on the sidelines – no reason to step in yet,” said Hampstead Capital hedge fund manager Lex Van Dam.
Markets bet on a further cut in Bank of England interest rates, almost fully pricing in a 25 basis point cut by the end of the year in another blow to sterling and to banks already facing reduced earnings as a result of Britain leaving the EU.
An index of European bank shares fell 7.3 per cent, taking losses in the last two trading days to around 20 percent. Royal Bank of Scotland shares fell 24 per cent while Barclays shed 18 per cent.
Italian banks also suffered. UniCredit fell 7.4 per cent. The government was looking at options to help its banks and prevent further share price falls.
The pan-European FTSEurofirst 300 stocks index, which fell 7 per cent on Friday in its biggest plunge in nearly eight years, lost a further 2.5 per cent on Monday.
Britain’s FTSE 100 index ebbed a further 1.5 per cent on Monday and Germany’s DAX lost 1.8 per cent.
Spain’s IBEX index initially rose after acting Prime Minister Mariano Rajoy’s People’s Party fared better than expected in weekend elections but the gains melted away and the index was last down a modest 0.5 percent.
World stocks measured by MSCI hit their lowest level since March.
Sterling fell 3.7 per cent to as weak as $1.3192, surpassing its Friday low as yields on 10-year British government debt fell below 1 percent for the first time.
It fell 2.5 per cent to 83.33 pence against the euro and 3.8 percent to 134.12.10 yen.
“Uncertainty equals currency weakness, we know this, and there is no sense that this (sterling) is a value trade right now and that you have to get back in. It is too early for anyone to start calling a bottom,” said Neil Mellor, a currency strategist at Bank of New York Mellon in London.
The euro, also considered vulnerable to the exit from the EU of its second-largest economy, fell nearly 1 percent to $1.1016, off a low of $1.0980. The yen strengthened to as high as 101.43 per dollar per dollar.
Government officials stepped up warnings that they could intervene in currency market to stabilize the yen, whose strength harms exporters.
This helped Japan’s Nikkei 225 share index, which closed 2.4 per cent higher. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4 per cent. Companies with UK exposure in particular came under pressure.
The market impact on Brexit has been orderly so far and there are no signs of a financial crisis arising from Brexit, U.S. Treasury Secretary Jack Lew said in an interview to CNBC.
However, uncertainty surrounding when and on what terms Britain will end its membership is expected to keep markets volatile for the next few weeks.
“There is a crisis of confidence in the markets,” said Todd Morgan, Chairman at Bel Air Investment Advisors in Los Angeles, California. “But there is a lot of cash lying around and interest rates are low, the world will survive.”
The U.S. dollar and gold rose, while the yield on the 10-year U.S. treasury bond fell on Monday.
The Brexit vote, which Federal Reserve Chair Janet Yellen had said would have significant repercussions on the U.S. economic outlook, is expected to scuttle the Fed’s ability to raise short-term interest rates.
Traders have priced a meager 1.9-per-cent bet on an interest rate increase in November, according to CME Group’s FedWatch tool.
Ms. Yellen pulled out from the ECB Forum on Central Banking summit starting on Monday.
Oil prices slid on Monday as market participants absorbed the shock of Britain’s vote to leave the European Union though some analysts said Brexit would have a limited impact on global fuel demand.
Brent crude futures were down 76 cents at $47.65 a barrel. U.S. crude was down 85 cents at $46.79 a barrel.
Both crude benchmarks slumped about 5 per cent on Friday amid plunging global financial markets after the British referendum results gave an unexpected 52 per cent to 48 per cent victory to the campaign to take Britain out of the EU.
Oil prices rose slightly early on Monday as analysts said Britain’s EU exit would have very little impact on physical oil trading – before slipping back later.
“If we assume a 2-per-cent drop in UK GDP in response to the exit vote, which is on the high end of our economists’ estimates, then UK oil demand would likely be reduced by 1 percent or 16,000 barrels per day, which is a 0.016 percent hit to global demand. This is extremely small on any measure,” said Goldman Sachs.
International Energy Agency chief Fatih Birol also downplayed the impact of Brexit on global oil demand.
“Since a big chunk of oil demand is from emerging countries, namely Asia, I don’t see a major impact (of Brexit) on oil demand,” he told Reuters.
PVM’s Tamas Varga said given Brexit’s limited impact on global oil demand in the foreseeable future, a tightening in the oil market remained on the cards in the second half of the year.
“If one subscribes to this view then it is not difficult to conclude that the Brexit-triggered oil price sell-off should not last and the downside is limited,” he said.
Of more concern to the market on Monday was a growing glut of refined products.
“For near-term oil, we remain most concerned about product oversupply, China demand, the macro outlook, and the likely return of production,” Morgan Stanley said in a note.
Chinese refiners have responded to the Asian oil products glut by exporting record amounts of gasoline and diesel fuel into regional markets, eroding refinery profit margins and swelling storage.
Morgan Stanley said the larger political and policy repercussions of a Brexit could not be ignored.
“Europe is a big trading partner for the United States and China, which could lead to knock on global effects, and a stronger dollar is generally unhelpful for demand,” Morgan Stanley said.
“In a high stress case, our economists see global GDP slowing to 2.7 per cent in 2017 – nearly a global recession.”

Premarket: Stocks inch higher as Brexit vote looms, Yellen cools rate talk

Jamie McGeever
05:25 EST Wednesday, Jun 22, 2016

LONDON — Stocks and sterling rose while traditional safe-haven assets gold and bonds slipped on Wednesday, as investors were guardedly optimistic about a “Remain” vote in Britain’s European Union referendum later this week.
Riskier markets also drew support from Federal Reserve Chair Janet Yellen’s cautious comments on the U.S. economy the previous day, in which she virtually ruled out a July rate hike.
Europe’s FTSEuroFirst index of 300 leading shares was up 0.1 per cent, Germany’s DAX was up 0.5 per cent, France’s CAC 40 was up 0.3 per cent and Britain’s FTSE 100 was up 0.1 per cent.
Basic resource stocks were among the biggest gainers in Europe, lifted by oil’s rise of almost 1 per cent.
U.S. futures pointed to a rise of 0.1 per cent at the open on Wall Street, following on from Tuesday’s 0.27 per cent rise on the S&P 500 Index.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.5 per cent, chalking up its fourth straight daily gain, but Japan’s Nikkei fell 0.6 per cent thanks to a stubbornly strong yen.
The strength of the Japanese currency, often considered a safe haven asset, countered the broader increase in risk appetite across financial markets a day before Britain’s EU referendum.
“Although the Remain camp has managed to stem the recent wave of support for the Brexiteers, the outcome is still very much uncertain and trading is likely to be sporadic and volumes thin in the next two sessions,” said Kathleen Brooks, research director at Gain Capital.
“With the EU referendum on a knife-edge, the market is right to look elsewhere for direction. Some of this came from Yellen, who reinforced (the) message that the Fed will slow the pace of rate hikes if the U.S. economy posts another dismal jobs report for June,” she said.
Sterling rose around 0.5 per cent against the dollar above $1.47, edging back up towards Tuesday’s near six-month high of $1.4781. The pound has risen 5 per cent since hitting a three-month low of $1.4010 on Thursday.
The polls are extremely close, but betting patterns with bookmakers have shown a re-opening of the gap in favor of “Remain” after the murder last week of a pro-EU lawmaker was deemed to have derailed the Brexit campaign.
For the latest Reuters news on the referendum including full multimedia coverage, click Fed chief Janet Yellen said on Tuesday that the risk of Brexit was something that needed watching “very carefully,” but added that the central bank’s ability to raise interest rates this year may hinge on a rebound in hiring.
“A couple of months ago, Yellen was cautiously optimistic. Now she appears cautious while trying to be optimistic,” said Tohru Yamamoto, chief fixed income strategist at Daiwa Securities.
“Judging from her comments, a rate hike in July is completely off the table. It is questionable whether the Fed can have enough solid economic data to back up a rate hike even by September,” he said.
The dollar slipped 0.3 per cent against the yen to 104.47 yen, and the euro was last up 0.2 per cent at $1.1265 .
European Central Bank President Mario Draghi said on Tuesday that Britain’s referendum was adding uncertainty to markets, and that the ECB was ready to act with all instruments if necessary.
As investors grew more hopeful of a “Remain” vote, spot gold languished, falling 0.2 per cent to a near-two-week low of $1,262 an ounce.
On the other hand, oil prices extended their recovery after news of a larger-than-expected draw in U.S. crude stockpiles.
Crude inventories fell by 5.2 million barrels for the week ended June 17, the American Petroleum Institute (API) said. The trade group’s figures were triple the draw of 1.7 million barrels forecast by analysts in a Reuters poll. API/S
Brent crude futures advanced 0.8 per cent to $51.03 per barrel, while U.S. crude futures’ new benchmark August contract rose 1 per cent to $50.34.
Bonds were mostly weaker, with the yield on 10-year UK gilts up two basis points to 1.31 per cent and even longer-dated yields on U.S. and German bonds inching up too.
Benchmark 10-year U.S. and German yields were flat at 1.69 per cent and 0.05 per cent, respectively.

BoC sees economy shrinking in second quarter on Alberta wildfires

10:03 EST Wednesday, May 25, 2016

OTTAWA — The Bank of Canada says the country’s economy will likely shrink in the second quarter, dragged down by the Alberta wildfires and persistently weak business investment.
But the central bank, which held its key interest rate unchanged Wednesday, said growth will rebound in the third quarter as the oil patch resumes full production and rebuilding begins in Fort McMurray.
The hit from the fires, which destroyed thousands of buildings in the northern Alberta city, will knock 1 ¼ percentage points off gross domestic product in the April to June period, according to a statement that accompanied the rate decision. In April, the bank had forecast 1-per-cent growth in the second quarter.
It would mark a second bout of contraction in the past year for the economy, which also retreated in the first and second quarters of last year.
In its statement, the bank remarked on the economy’s bumpy recovery from the collapse in the price of oil that began in 2014.
“The economy’s structural adjustment to the oil price shock continues, but is proving to be uneven,” the bank said.
The central bank also pointed to “fragile sentiment” in global financial markets – a worry that Bank of Canada Governor Stephen Poloz highlighted in a recent speech.
The statement also raised fresh concerns about household debt due to “divergences” in regional housing markets. “In this context, household vulnerabilities have moved higher,” the bank said.
The housing market is in retreat in Alberta, but continues to boom in parts of Ontario and British Columbia, where prices and starts continue to ratchet higher.
The rest of the economy is evolving largely as the bank anticipated in its April forecast. The Canadian dollar, now at roughly 76 cents (U.S.), and inflation are both in line with its earlier projections. The price of crude, now just shy $50 (U.S.) for West Texas Intermediate, has recovered some lost ground.
“The global economy is evolving largely as the bank projected in its April monetary policy report,” according to the statement.
And the bank said the risks to its critical inflation projection remain “roughly balanced” – a sign the bank is in no hurry to follow the U.S. Federal Reserve’s lead and raise rates.