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The Toronto stock market started the trading week off positive Monday, led by higher commodity and financial stocks.
The S&P/TSX composite index closed up 65.17 points to 11,750.54 after a lukewarm start to the U.S. quarterly earnings season and moves by China to cool its economy had pushed the main index down more than two per cent last week to below where it started the new year.
“When China raised the reserve requirements (for banks), it was unexpected,” said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.
“All of a sudden, you say: is some of the global stimulus going to be removed quicker than I thought?”
The TSX Venture Exchange climbed 12.25 points to 1,605.72.
Volumes were lower than normal as New York markets closed for the Martin Luther King holiday.
A day before the Bank of Canada makes its scheduled announcement on interest rates, the Canadian dollar moved 0.28 of a cent higher to 97.42 cents US. The central bank is widely expected to leave rates — which hover near zero — alone until at least the end of the second quarter.
The base metals sector was up 1.39 per cent. Late Monday afternoon, the March copper contract on the New York Mercantile Exchange rose five cents to US$3.41 a pound in electronic trading. Regular trading on the New York Mercantile Exchange was also closed Monday for the King holiday.
Teck Resources (TSX:TCK.B) added 43 cents to $41.23 while Labrador Iron Mines Holdings (TSX:LIM) ran up 69 cents to $5.57.
The February crude contract rose 25 cents to US$78.25 a barrel shortly before the TSX closed, taking the energy sector ahead 0.63 per cent. EnCana Corp. (TSX:ECA) improved 46 cents to $35.67 while Imperial Oil (TSX:IMO) gained 46 cents to $41.10.
Crude prices fell every day last week, losing just over five per cent, as the first batch of fourth-quarter earnings and economic data pointed to signs of continued weakness in the U.S. economy.
Oil and gas explorer Enterra Energy Trust (TSX:ENT.UN) said Monday it will convert to a corporation by the end of May, changing its name in the process to Equal Energy Ltd. Calgary-based Enterra said Monday it wants to make the move before a change in the rules governing the taxation scheme for trusts takes effect in 2011. Enterra units jumped 56 cents or 25.93 per cent to $2.72.
Shares in Cirrus Energy Corp. (TSXV:CYR) dropped 68 cents or 24.46 per cent to $2.10 after delivering a disappointing update on its drilling activities at its subsidiary in Holland. A platform refurbishment was meant to allow “continuous uninterrupted production” from its well. Instead, production performance has steadily declined.
The financial sector moved up 0.65 per cent after losing ground at the end of last week in the wake of disappointing earnings results from American banking giant JPMorgan Chase. TD Bank (TSX:TD) was ahead 75 cents to $64.10 and Manulife Financial was up 22 cents at $20.54 .
The February gold contract was ahead $2.90 to US$1,133.40 an ounce and the gold sector edged up 0.19 per cent.
When Wall Street returns on Tuesday, the focus will turn towards the next batch of fourth-quarter corporate earnings figures, including those from Citigroup Inc. and IBM Corp.
So far, earnings have been fairly mixed, with upside surprises from the likes of Intel Corp. offset by disappointments elsewhere, most notably Alcoa Inc. and JPMorgan Chase.
“Are they going to meet their guidance? And how are they going to meet it? asked Nakamoto.
“Expectations have ratcheted up.”
In other corporate news, a group of bidders, including former Canadian senator Jerry Grafstein, says it’s preparing to make an offer for some of Canwest’s (CGS.V) newspapers, including its flagship National Post. The consortium of investors also includes former Global TV executive and Montreal Star editor Raymond Heard and writer and broadcaster Beryl Wajsman.
But Nakamoto said he expected there are funds and companies that would be interested in the whole newspaper chain.
“I would think there’s a bunch of private equity investors _ like even Onex Corp. (TSX:OCX). Why wouldn’t they look at it? It seems right up their alley. Or why wouldn’t the Ontario Teachers Pension Fund look at it? There’s a lot of money out there.”
Canwest shares were off one cent at 7.5 cents.
Mosaid Technologies Inc. (TSX:MSD) shares rose $1.45 to $21.51 after it said its revenue will be $3 million higher in the 2010 financial year than previously thought, rising to an estimated range of $68 million to $70 million. It said the improved performance is the result of a landmark licensing agreement between the Ottawa patent firm and Samsung Electronics Co., Ltd.
Heritage Oil Corp. (TSX:HOC) says that Tullow Uganda Ltd. has exercised its right to pre-empt Heritage’s sale of a 50 per cent interest of two blocks in Uganda to Italy’s Eni International B.V., and will pay more than US$1.35 billion for the assets. Heritage shares ran ahead $1.90 or 24.24 per cent to $10.20.
Financially troubled Coalcorp Mining Inc. (TSX:CCJ) says the proposed US$150-million sale of its La Francia coal mine in Colombia has been threatened by a company allegedly controlled by former Coalcorp directors. Coalcorp said Monday it received a letter from Blue Pacific Assets Corp. advising that it will ask a court to block the sale unless it receives about $2 million of royalties that are purportedly overdue and assurance that Coalcorp will terminate the proposed sale of La Francia to Goldman Sachs. Coalcorp shares were 1.5 cents higher at 19.5 cents.
New Flyer Industries Inc. (TSX:NFI.UN) said Friday it received orders for 711 buses in the fourth quarter for a total of $308 million. The company said the orders included 506 new firm and option orders and 205 exercised options for buses. Its units added 10 cents to $10.50.
Safeway Inc. is sponsoring a gameday area on Sunday for the Arizona Cardinals home game in Glendale.
Safeway’s Gameday Experiene includes games, video game and TVs broadcasting other National Football League games. It also features food and drink stands offering samples of tailgating fare and other products fans might buy from the grocery store.
Safeway hosted a similar event outside University of Phoenix Stadium for the Nov payday loans with no fax. 15 game against the Seattle Seahawks.
The Cards game against the Minnesota Vikings is televised Sunday night on NBC. The Safeway promotion is free and located east of the stadium. The game starts at 6:20 p.m.
The U.S. view that China is keeping its currency undervalued in order to boost exports will foster a “more contentious” relationship between the two nations, said Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong.
The convergence of mounting U.S. unemployment and next year’s Congressional elections will make it easy for both Republicans and Democrats to criticize China, Roach said in a Bloomberg Television interview aired today in New York.
“It will get more contentious as we move into 2010,” he said. “There’ll be a lot of cries on both sides of the aisle to do something about the plight of the American worker. China is, unfortunately, the whipping boy in many of these discussions.”
The U.S. Treasury Department yesterday criticized China in a semiannual report to Congress, saying “the recent lack of flexibility of the renminbi exchange rate and China’s renewed accumulation of foreign-exchange reserves risk unwinding some of the progress made in reducing imbalances.” The Treasury stopped short of branding China a manipulator of its yuan, also known as the renminbi.
Roach, author of the newly released book “The Next Asia: Opportunities and Challenges for a New Globalization,” said the U.S. must think “long and hard” about its relationship with China, which has financed America’s appetite for consumer goods by buying Treasury securities.
Less Influence
China may “move outside the sphere of influence of the U.S.” as its domestic demand rises and exports become a smaller contributor to growth, he said. “The time will come when they are less reliant on us,” Roach said. “We still need an international lender of last resort. Who’s going to help us out, it’s a fair question.”
China needs to boost investment in social security, private pensions, and insurance for unemployment and medical care, Roach said, to prompt its consumers to save less and buy more goods from overseas.
“Until they can address that key issue, the development of a broad-based consumer culture is still too far out in time,” Roach said.
Confidence in the world economy rose for a third straight month in October as gains in manufacturing and equities added to signs of recovery, a Bloomberg survey of users on six continents showed.
The Bloomberg Professional Global Confidence Index increased to a record 61.7 from 58.54 in September. The index exceeded 50 for a third month, which means there were more optimists than pessimists.
“Conditions have reached a point of stability worldwide,” said Guy LeBas, chief economist and fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who participated in the survey. “We’re seeing growth even in parts of the world that were looking dull earlier. The eurozone is coming out of the recession fairly quickly and in decent shape and the U.S. is improving.”
The global equity rally has added about $20 trillion to the value of stocks since this year’s low on March 9 as evidence mounts that the world economy is emerging from its deepest recession since the 1930s. The pace of the recovery may be tempered as stimulus measures undertaken by policy makers fade out and unemployment threatens to continue rising.
“Asset markets are rising and that’s having positive wealth effects and helping confidence come back a bit stronger,” said Robert Subbaraman, chief economist for Asia excluding Japan at Nomura International Ltd. in Hong Kong. “There are still problems with the world economy as a lot of the support is being fueled by loose policies which cannot be sustained.”
China Exports, Intel
Stocks rose today. The MSCI World Index climbed 0.9 percent to a one-year high as the decline in China’s exports slowed and Intel Corp.’s sales forecast topped analyst estimates. JPMorgan Chase & Co., the second-largest U.S. bank by assets, said profit in the third quarter soared almost sevenfold as fixed-income revenue surged.
Confidence may abate in the event that stocks erase part of their advance. The MSCI World Index has surged 67 percent since March 9, driving valuations on the gauge of 23 developed countries as high as 27.9 times annual earnings, data compiled by Bloomberg show. The Standard & Poor’s 500 Index is priced at 20.3 times profit, the highest level since 2004.
The survey of more than 1,400 Bloomberg users was conducted between Oct. 5 and Oct. 9. Since the previous survey, Group of 20 leaders vowed to keep stimulus measures until growth takes hold, the International Monetary Fund boosted its forecast for the global economy this year and next, and the Reserve Bank of Australia raised interest rates.
‘Gathering Steam’
Europe’s manufacturing and services industries expanded more than initially estimated last month, while some U.S. gauges of production are showing an acceleration in activity. India’s industrial production rose the most in 22 months in August, while China’s output gains were the fastest in almost a year.
“Investors think the recovery is gathering steam,” said Christopher Low, chief economist at FTN Financial in New York and a participant in the survey. “Manufacturing has shown the most improvement, and global trade is picking up.”
The world economy will contract 1.1 percent this year, and expand 3.1 percent in 2010, the Washington-based IMF said earlier this month.
Policy makers are debating the timing of the withdrawal of monetary and fiscal policies that have helped avert another Great Depression. Federal Reserve Chairman Ben S. Bernanke on Oct. 8 said the U.S. central bank is prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”
Exit Strategies
New Zealand’s central bank is removing some of the liquidity facilities it put in place last year, while the Bank of Japan left its benchmark rate near zero today and refrained from saying if it would end its corporate debt purchase programs.
“The dynamic of the global recovery is very intense,” said Jose Carlos Diez, chief economist at Intermoney SA in Madrid. “If the central banks get nervous and put the brakes on too fast, that could abort the recovery.”
Bloomberg users in Spain are the most pessimistic on their economy as the nation remains mired in a recession even after France and Germany returned to growth. Spain’s index fell to a four-month low of 10 from 14.5 in September. The confidence gauge for western Europe rose to 44 from 43.2 last month.
Dollar Weakness
Confidence jumped the most in the Latin American region this month, with its index advancing to 72.9 from 65.5 in September. Brazil, the region’s biggest economy, is unwinding stimulus measures amid a resumption of growth as the central bank tightened rules for lenders to meet reserve requirements.
Sentiment fell in Japan, where a strengthening yen against the dollar is eating into company profits just as global demand stabilizes. The gauge for Japan declined to 38.8 from 48.8, while that for Asia rose to 76.2 from 73.6.
“In Asia, the biggest threat is the weakness in the dollar, because those economies are so dependent on exports to the U.S.,” Low of FTN Financial said.
The U.S. dollar may weaken further in the next six months against the world’s most actively traded currencies, as the survey showed sentiment near an 18-month low. The trade-weighted Dollar Index has fallen 7 percent this year, and gold, which usually moves inversely to the U.S. currency, is at a record. The dollar confidence index was 31.2 from 30.8 in September.
Users in Japan are less optimistic about the yen’s appreciation against the dollar, with the index falling to 56.9 from 62.1. Respondents in western Europe are still betting the euro will strengthen against its U.S. counterpart.
Stocks Sentiment Mixed
Bloomberg users were mixed on the outlook for their equity markets in the next six months. Respondents in the U.S., Japan and Spain expect shares to decline, while those in Brazil, Mexico and Italy predict their markets will extend their advances.
New York University Professor Nouriel Roubini, who predicted the financial crisis, on Oct. 3 said stock and commodity markets have gone up “too much, too soon, too fast” and may drop in the coming months as the gradual pace of the recovery disappoints investors.
Survey participants in the U.S., Europe and Latin America are also more confident short-term interest rates will rise in the next six months, the survey showed.
The Bank of England plans to spend the remainder of its 175 billion-pound ($278 billion) bond- purchase program as officials seek to drive home the economy’s recovery.
The Monetary Policy Committee, led by Governor Mervyn King, kept the target for its plan unchanged today, as predicted by all 42 economists in a Bloomberg News survey. The central bank also maintained the benchmark interest rate at a record low of 0.5 percent.
Policy makers will use new forecasts next month to appraise the plan, which prompted a split on the committee in August when King favored spending even more. Former Deputy Governor John Gieve said in an Oct. 6 interview that officials may consider an expansion in November because they will be wary of a “false dawn” for the economy.
“We’re heading to a recovery of sorts, but unemployment is still rising and bearing down on inflation,” said Alan Clarke, an economist at BNP Paribas SA in London. “There’s still a case for more purchases, and I think they will do more in November.”
The pound rose against the dollar after the decision. The U.K. currency was at $1.6071 as of 12:48 p.m. in London, from $1.5969 yesterday.
The European Central Bank today kept its benchmark interest rate at a record low of 1 percent, as predicted by all 53 economists in a Bloomberg News survey. The U.S. Federal Reserve held its target rate at close to zero on Sept. 23.
Election Approach
Prime Minister Gordon Brown is trying to revive Britain’s economy in time for an election which he must call by June 2010. His ruling Labour Party fell to third place for the first time since 1982 in an opinion poll finished on Sept. 27.
There are signs that the economy is picking up in the U.K. and around the world. Australia’s central bank on Oct. 6 became the first Group of 20 nation to raise interest rates since the start of the global financial crisis.
U.K. House prices rose 1.6 percent in September, a third consecutive gain, Halifax said on Oct. 6. Services industries expanded at the fastest pace in two years and consumer confidence rose the most since 1995, reports have shown.
At their Sept. 10 decision, policy makers said rising asset prices could create a “virtuous upward spiral” for the economy. Chief Economist Spencer Dale said last month that he favored limiting the increase in so-called quantitative easing to 175 billion pounds because of the risk spending more might stoke asset prices too much.
King’s Vote
King had favored a bigger increase in the program to 200 billion pounds as the bank’s predictions showed inflation may not return to the 2 percent target in two years. He and policy maker David Miles, who had sided with King, opted for consensus on the nine-member panel at the September meeting, while saying a bigger increase could still be justified.
The bank has so far bought more than 160 billion pounds of government and company bonds and has pledged to spend the remainder of its plan by November.
Miles said Sept pay day loan lenders. 30 that the bond purchases are “having an impact that is relevant to economic conditions right across the country.” The yield on the 10-year U.K. government bond was 3.39 percent today, compared with 3.64 percent on March 4, the day before quantitative easing started.
Weakness Persisting
The economy has shown some signs of persisting weakness. Manufacturing unexpectedly dropped in August to the lowest level since 1992, the inflation rate has fallen to the lowest since January 2005 and unemployment is at its highest in 14 years. British Airways Plc, Europe’s third-biggest airline, said Oct. 6 that 1,000 flight attendants have agreed to voluntary job cuts.
“The main risk, short term, is that everyone thinks the recovery is over, we tighten too quickly, and we see a sort of ‘W’ emerge,” Gieve said. “The manufacturing figures are a reminder that it’s too early to say it’s definitely over” and extending the asset-purchase plan next month “will be an option they’ll look at pretty closely,” he said.
David Blanchflower, a former policy maker who left in May, said the bank should expand its bond plan and also cut the rate it remunerates commercial bank reserves. Blanchflower tended to favor lower rates than his colleagues, and in three years on the panel, he voted for a reduction 19 times, favored no change on 16 occasions and wanted an increase only once.
‘Big Meeting’
“They’ve got to do more,” Blanchflower told Bloomberg Television today. “November will be a big meeting, and I suspect they’re going to do some more. The discount rate, remuneration on reserves may well be something that they can cut. Certainly, there’s thinking about more quantitative easing, and I suspect there’s still a thought about the possibility that 0.5 percent rate could come down further.”
Bank lending is also still constrained as institutions repair balance sheets damaged in the financial crisis. Lloyds Banking Group Plc said today that it will keep its options open after the Financial Times said the lender is preparing to raise 15 billion pounds in a share sale.
Britons cut consumer debt for a second month in August, repaying a net 309 million pounds, the most since April 1993. The average interest rate on mortgages fixed for two years was 4.42 percent in August, compared with 3.98 percent in March when the bank started quantitative easing.
Minutes of today’s deliberations will be released on Oct. 21. The next decision is due on Nov. 5 and the bank will publish its new quarterly forecasts a week later.
“This meeting is a holding position until we get to November,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former central bank official. “If I were on the committee, I’d increase quantitative easing, but it’s a difficult decision.”
Royal Bank of Scotland Group Plc posed such a threat to the British and global financial systems at the height of the crisis last year that Prime Minister Gordon Brown could have ended up fully seizing the bank, former Bank of England official John Gieve said.
Brown didn’t need to go that far because Fred Goodwin, then RBS chief executive officer, conceded to government rescue aid on the weekend of Oct. 11-12, Gieve said. Other officials were scrambling from London to Washington and Paris at the time to coordinate the response to the panic sparked by Lehman Brothers Holdings Inc.’s collapse four weeks earlier.
“If Royal Bank of Scotland hadn’t been propped up as it was, in practice it would have been nationalized the following week,” Gieve, who was the bank’s deputy governor at the time of the 2008 crisis, said in a Bloomberg Television interview yesterday. “If RBS, HBOS, Lloyds had gone down, that would have had huge contagious effects throughout the rest of the world.”
Brown’s government took stakes in RBS, Europe’s biggest bank by assets at the time, and Lloyds Banking Group Plc, the bank formed in the merger of Lloyds TSB Group Plc and HBOS Plc, as the financial crisis intensified. Gieve said some bank chiefs resisted aid before realizing that “the game was up” and accepting the full rescue package unveiled on Oct. 13, 2008.
‘Crashing’ Dreams
“For the boards and chief executives, particularly of RBS and HBOS, this was a terrible day,” Gieve said. “All their dreams were crashing to the ground, but there wasn’t a great deal of arguing. In truth, both RBS and HBOS knew they needed government support and they were being told the terms they had to accept.”
Goodwin and Andy Hornby, who was chief executive officer of HBOS, then resigned as their banks ceded majority control to Brown’s government. HBOS, the country’s biggest mortgage lender at the time, is based in Edinburgh, as is RBS.
The two banks were not “confident they could get to the end of the day,” on Oct. 6 and Oct. 7, 2008, Bank of England Governor Mervyn King told the BBC in an interview broadcast last month. On Oct. 8, the government offered to take stakes in British banks to shore up their capital.
Gieve said that he spent much of the following weekend in negotiations with the banks, the U.K. Treasury and the Financial Services Authority to prepare the rescue package.
The talks took place amid an “intensive diplomatic effort” to press for other governments to recapitalize their banks, Gieve said. Alistair Darling, the finance minister, was with King at the International Monetary Fund meetings in Washington and Brown was in Paris to discuss the crisis with European Union leaders.
‘We Pulled it Off’
“This was something that has never been done before, an attempt to recapitalize the heart of the British banking system in two days flat, and at the same time persuade the rest of the world and the rest of Europe that this was the model which they should adopt,” Gieve said. “We pulled it off.”
The deal wasn’t perfect and had to be tweaked in January to adjust the terms of the RBS bailout, Gieve said. The government now owns stakes of 70 percent in RBS and 43 percent in Lloyds Banking Group.
“We had to convince the markets that this was enough, that they didn’t need to worry that any of these banks were going to fail,” he said. “It did that trick. It was a reestablishment of confidence that was key, not the actual fine print of the numbers.”
Gieve, who left the central bank at the end of February, also participated in the global coordinated interest-rate cut on Oct. 8, 2008.
‘Real Tsunami’
“The coordinated cut wasn’t as important as the recapitalization of the banks,” he said. “Everyone was focused on the fact there was a real risk of total financial meltdown, and a real risk of another Great Depression. In the summer, we’d been in a storm which was severe. We were now facing a real tsunami which could sweep away all we’d worked for, for years.”
Asked to identify his biggest mistakes during the three years he spent as deputy governor, Gieve said that he wished he had spoken out more about the risks to the financial system before the crisis. He also said that interest rates should have been higher in the U.K. from 2005.
“We did identify vulnerabilities in the financial system in 2006, including things like wholesale funding exposure and so on,” Gieve, 59, said. “But we didn’t make enough noise about them. Personally, I just wish that I’d beaten the drum a bit more than I did.”
The U.S. was displaced by Switzerland as the world’s most-competitive economy after its financial markets were roiled by the worst crises since the Great Depression, the World Economic Forum said today.
The U.S. fell to second position for the first time since the Geneva-based organization began its current index in 2004 as it lost marks for the sophistication of its markets and rising budget deficits. Switzerland was credited for its stability and ability to innovate.
“A number of escalating weaknesses have taken their toll on the U.S. ranking this year,” the study of 133 countries ny the Geneva-based organization said. “Switzerland’s performance has remained relatively stable.”
The loss of efficiency by the world’s largest economy is another obstacle to a fast recovery even as it begins to show signs of emerging from its deepest recession since World War II.
Reduced confidence in its banking system after the collapse a year ago of Lehman Brothers Holdings Inc. meant the U.S. slid to ninth from 20th when ranked for the attributes of its markets. A measure of how easy access to finance is fell to 106th this year, close to Albania and Mali, from 40th last year, while a budget deficit now above $1 trillion pushed its grade for economic stability to 93rd from 66th.
U.S. Faces Obstacles
The U.S. economy still won marks for its flexible product and labor markets, research and development and technological advances. ‘These factors remain a driving force behind U.S. productivity and will support recovery from the current recession,” the forum said.
The U.S. economy may be slow to pull out of its slump as data suggest obstacles to expansion remain. While the economy lost the fewest jobs this year in August, unemployment climbed to a 26-year high, a U.S. Labor Department report showed Sept. 5.
Switzerland took the top spot after being ranked third in the world for business sophistication and second for its capacity to innovate. Its economy was ranked 17th for stability.
Recent indicators show the Swiss economy is emerging from its worst recession in three decades quick cash. Gross domestic product contracted 0.3 percent in the second quarter from the previous three months, less than economists expected. Exports rose in July after falling for two months and investor confidence jumped to a three-year high in August.
Returning to Growth
“Some months ago, uncertainty was much higher and I expected worse” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “But given these latest data, it looks as if the economy is stabilizing on a solid level. I expect the economy to expand again in the third quarter.”
Singapore, Sweden and Denmark rounded out the top five, followed by Finland, Germany, Japan, Canada and the Netherlands. Among the other Group of Seven nations, the U.K. slipped one slot to 13th, France held at 16th and Italy rose a place to 48th, although remained below Barbados in 44th.
China climbed one place to 29th, while India and Brazil also gained to 49th and 56th respectively. Russia fell 12 places to 63th because of concern about the government’s growing role in its economy and the independence of its justice system. In Latin America, Chile was the highest placed ranking 30th and Qatar outpaced its Middle East counterparts coming in at 22nd.
Governments should be wary of not taking steps to fortify their economies even once the crisis passes, said Xavier Sala-i- Martin, an economics professor at Columbia University in New York, who helped write the report. The International Monetary Fund now expects the world economy to grow 2.9 percent next year rather than 2.5 percent it predicted in July.
“It is critical that policy makers not lose sight of long- term competitiveness fundamentals amid short-term urgencies,” said Sala-i-Martin. “A competitiveness-supporting economic environment can help national economies to weather business cycle downturns.”
European Central Bank President Jean-Claude Trichet said the bank won’t necessarily raise interest rates when the time comes for it to start withdrawing other emergency stimulus measures.
“The term ‘exit strategy’ should be understood as the framework and set of principles guiding our approach to unwinding the various non-standard measures,” Trichet said at an event in Frankfurt today. “It does not include considerations about interest policy.”
The comments suggest the ECB is prepared to leave its benchmark rate at a record low of 1 percent for an extended period to nurture an economic recovery in the euro region. Trichet also said the ECB would only scale back its emergency lending to banks when credit starts to flow normally through the economy and inflation risks emerge.
Trichet is trying to ensure that when the ECB starts unwinding some of its non-conventional measures next year, investors don’t interpret that as a signal rate increases are imminent, said Ken Wattret, chief euro-area economist at BNP Paribas SA in London. “The last thing they need right now is an expectation of a rate increase, with a very high risk that the current economic momentum may tail off by next spring,” he said.
Fed’s Exit Signal
The U.S. Federal Reserve signaled in minutes published Sept. 2 that it’s already trying to prepare investors for an end to some of its asset purchases. The ECB has focused on lubricating bank lending in an effort to rekindle growth in Europe. It is offering banks as much cash as they want at its benchmark rate for terms of up to a year.
“From today’s perspective, the need for enhanced credit support remains,” Trichet said. “Notwithstanding some recent signs of improvement in the economic outlook, it is premature to declare the financial crisis over. Stressing the importance of the exit strategy should not be confused with its implementation.”
Trichet used today’s speech to outline how the ECB’s stimulus measures will be withdrawn when the time comes. Many of the measures will “naturally unwind over time” as existing loans mature and demand for additional cash wanes, he said. The ECB can also use fine-tuning operations to absorb excess liquidity if needed, he added.
Inflation Risks
“One scenario would be that problems in money markets disappear before any upside risks to price stability emerge,” ECB Executive Board member Juergen Stark said at the same conference today free business cards. “This means that the non-standard measures would be withdrawn before rates are raised, and the withdrawal of the measures would not be expected to have much impact.”
If inflation risks emerge before problems in money markets dissipate, the ECB “may have to maintain parts of the enhanced credit support while rates are raised,” Stark said.
The economy of the 16-nation euro region probably expanded this quarter, bringing an end to its worst recession since World War II. It contracted just 0.1 percent in the second quarter after Germany and France, the two largest economies in the region, unexpectedly returned to growth.
The ECB yesterday raised its economic forecasts for the euro region to predict growth of about 0.2 percent in 2010 instead of a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago.
G-20 Talks
Still, rising unemployment and the expiry of government stimulus packages may damp economic growth next year. Trichet flies to London today to discuss the global response to the financial crisis with officials from the Group of 20 nations.
International Monetary Fund Managing Director Dominique Strauss-Kahn said today there’s a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.
“Given the fragility of the recovery, there are risks that it could stall,” Strauss-Kahn said in a speech in Berlin. “Premature exit from accommodative monetary and fiscal policies is a principal concern.”
Speaking at the same conference, ECB council member Axel Weber said there will “in all likelihood be further tests and a bumpy road ahead.” While world leaders should discuss strategies for unwinding emergency policies, “the time is definitely not right to embark on taking such measures,” he said.
The ECB won’t raise interest rates before the third quarter of next year, a Bloomberg News survey of economists shows.
Stocks surged Friday, with the Dow, Nasdaq and S&P 500 all ending at fresh 2009 highs, after Fed chief Ben Bernanke said the economy is near a recovery and existing home sales posted their biggest jump in two years.
The Dow Jones industrial average (INDU) gained 156 points, or 1.7%, closing at the highest point since Nov. 4. The S&P 500 (SPX) index added 19 points, or 1.9%, closing at the highest point since Oct. 6.
The Nasdaq composite (COMP) rose 31 points, or 1.6%, ending at the highest point since Oct. 1.
Stocks have managed to rally in the last week, despite light trading volume and some worries about the impact of a potential economic slowdown in China. The advance got an additional leg up Friday after the economic news.
In particular, investors welcomed a report that showed existing home sales jumped for the fourth month in a row, rising well beyond forecasts.
"It was basically the highest level in two years and higher even than a year ago before the whole financial crisis, pre-Lehman," said Stuart Hoffman, chief economist at PNC Financial Services Group.
He said it is notable that economic indicators seem to be getting back to levels prior to last September, when the collapse of Lehman Bros. exacerbated an already brewing financial market meltdown.
"The report is basically telling us that the housing market has hit bottom," Hoffman said.
Gains were broad-based, with 29 of 30 Dow shares rising, led by Chevron (CVX, Fortune 500), Exxon Mobil (XOM, Fortune 500), Boeing (BA, Fortune 500), United Technologies (UTX, Fortune 500), IBM (IBM, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Caterpillar (CAT, Fortune 500) and 3M (MMM, Fortune 500).
Since hitting a more than 12-year low in early March, the S&P 500 has gained more than 50% as investors have moved out of panic mode and into a sense of cautious optimism.
That optimism is likely to sustain gains in the short term, as it enables investors to draw more cash out of money market funds and put it to work in riskier assets, said Mark Travis, president and CEO of Intrepid Capital Funds.
"We’ve had an awfully nice run since March and there’s still enough skepticism to keep us moving higher," Travis said. "Having said that, prices are not as attractive as they were in March and historically, there’s often a bigger selloff."
Housing: Sales of existing homes spiked 7.2% in July versus June and 5% versus a year ago.
Existing home sales for July rose at a 5.24 million unit annualized rate from a 4.89 million unit annualized rate in June, the fastest monthly pace in two years. Economists surveyed by Briefing.com expected sales to rise at a 5.1 million unit annual rate.
In other economic news, the number of states showing a drop in the unemployment rate tripled in July from June levels, according to a government report released Friday.
Bernanke: The Fed chief said the U.S. economy is on the cusp of a recovery, speaking at the Kansas City Fed Economic Symposium in Jackson Hole, Wyo. Bernanke said that the pace of the recovery will be slow and that unemployment will remain high.
Hoffman said the speech showed the significance of the coordinated actions taken by the Fed and Treasury and central banks around the world to stem the financial meltdown.
"The recovery is going to be moderate, but without all the actions taken over the last year, I don’t think we’d be talking about the economy stabilizing right now," he said. "We’d be talking about how the recession has no end in sight."
Company news: Gap (GPS, Fortune 500) reported higher quarterly earnings that topped forecasts in a report released late Thursday. But the clothing retailer also said sales fell from a year ago. Shares gained 3%.
Market breadth was positive and trading volume was light. On the New York Stock Exchange, winners beat losers by four to one on volume of 1.48 billion shares. On the Nasdaq, advancers topped decliners by over two to one on volume of 2.28 billion shares.
World markets: In overseas trading, European markets gained. Asian shares ended mixed, with the Chinese market higher and the Japanese market lower.
Oil: U.S. light crude oil for October delivery settled up 98 cents to $73.89 a barrel on the New York Mercantile Exchange, a 10-month high.
Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.57% from 3.42% Thursday. Treasury prices and yields move in opposite directions.
Other markets: COMEX gold for December delivery rose $13.50 to $955.20 an ounce.
In currency trading, the dollar fell versus the euro and gained against the Japanese yen.
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