The big picture

Dubai casts shadow on global economic recovery

On Thursday, news that Dubai’s Investment Company, Dubai World, may default on an upcoming maturity, rocked financial markets. Dubai World asked creditors for a six-month delay in the repayment a portion of its massive US$60-billion debt – much of it owed to foreign banks. While some worry that a default could derail the global economic recovery, the numbers pale in comparison to the US$2.8 trillion in writedowns the International Monetary Fund estimates U.S. and European lenders will have made between 2007 and 2010 as a result of the global credit crisis. German banks are currently already facing 75 billion Euros (US$113 billion) of write-offs on bad loans, according to the Deutsche Bundesbank. The U.S. dollar strengthened on the Dubai news as investors sought safety. The U.S. dollar had fallen to a one-year low on Wednesday when Russia’s Central Bank said it will invest some of its foreign exchange reserves in other currencies, and specifically in Canadian dollars.

Britain reported its economy shrank for a sixth consecutive quarter, but at a slower pace, keeping alive expectations of a return to growth by year-end. The U.K. is suffering its longest stretch of GDP declines since records began in 1955, while many of its trading partners – including France, Germany, and the United States – have already emerged from recession. The worst of the global economic crisis is over and government stimulus spending on infrastructure is flowing well, according to the Executive Vice President of Cisco Systems Inc., one of the world’s largest technology companies.

Markets

World markets rattled by Dubai debt

World stock markets and commodities fell sharply after news of a potential Dubai default unnerved investors. After hitting a record high mid-week, gold prices tumbled 5% on Friday as investors sought safety in dollars and cash, and the price of oil dropped 7%.

In the markets, Manulife Financial Corporation announced it will buy a 49% stake in a Chinese wealth management company to broaden its exposure to the fast-growing Asian market. Hewlett-Packard Company tripled the size of its share repurchase program to US$12 billion, as profits rose 14% on strong performance in China. Social networking website Facebook signalled it may be preparing for a public offering. In car news, Saab faces extinction as Swedish carmaker Koenigsegg backed out of a deal with General Motors. Porsche AG reported its debt ballooned to 11.4 billion euros (US$17.1 billion) in 2009 and predicts a loss of at least 1 billion euros (US$1.5 billion) in 2010. Volkswagen AG will acquire a 49.9% stake in Porsche AG by year-end as the first step of a merger to be finalized in 2011. Jewellery retailer Tiffany & Co. sparkled in the beaten-down luxury market, posting a better-than-expected third-quarter profit.   

The big picture

U.S. manufacturing grows amid rising unemployment

Showing unexpected strength, the U.S. manufacturing sector grew in October at its fastest pace since April 2006, suggesting U.S. gross domestic product is growing at an annualized rate of 4.5% in the fourth quarter. The manufacturing index rose for the third consecutive month in October after 18 consecutive months of contractions. The services sector grew for a second straight month in October, but at a slower pace than in September. Despite this growth, the unemployment rate rose to 10.2% in October, the highest since April 1983, with the largest job losses in construction, manufacturing and retail.

The Bank of Canada (BoC) is still predicting growth in the second half of 2009, even though recent GDP data indicated that the economy contracted in the third quarter. The BoC predicts the economy will grow 3.0% in 2010 and 3.3% in 2011. Finance Minister Jim Flaherty said on Monday that Canadians should not expect the employment market to recover as quickly as the general economy. “The recovery in jobs will lag recovery of the economy. That is to be expected. That is the lesson of past recessions. It takes time for businesses to regain confidence, to reinvest in their businesses and thereby create jobs.” Canada’s unemployment rate rose to 8.6% in October from 8.4% a month earlier as the economy shed 60,000 part-time jobs. Full-time employment increased slightly.

Markets

Stocks rally; GM does a U-turn

The TSX surged this week as gold prices reached a record US$1,101 after a pledge from the Federal Reserve to keep interest rates low weakened the U.S. dollar, and billionaire Warren Buffett bet big on the U.S economic recovery. North American markets also rallied on strong U.S. manufacturing data and better-than-expected earnings by technology bellwether Cisco, although the TSX was hit by surprise losses from Sun Life and Manulife.

General Motors did a U-turn, scrapping plans to sell Opel to Canadian auto parts supplier Magna. Unions are seething as GM Europe will now revert to a reorganization plan that chops fixed costs at Opel by 30%. Enbridge reported third-quarter profit more than doubled to $300 million versus one year ago. Warren Buffett will make his biggest ever investment, buying Burlington Northern Santa Fe Railway for US$44 billion in what the billionaire described as “an all-in wager on the economic future of the United States.” BlackBerry maker Research In Motion fell more than 6% on Monday after an analyst told investors to sell the stock because of mounting competition and an influx of new phones and applications.

The big picture

Canada’s GDP growth stalls

The latest reports on the Canadian economy unexpectedly showed no GDP growth in July, throwing into question the strength of the country’s recovery. Wednesday’s report from Statistics Canada dashed economists’ expectations of a 0.5% increase, blaming shutdowns at mines, lower oil-and-gas extraction, civic strikes and poor weather. On the bright side, employers added 27,000 jobs in August, and new applications for employment insurance fell. Prime Minister Stephen Harper reported that 90% of the economic stimulus funding has been allocated and that the money will create or support 200,000 jobs over two years by funding 7,500 infrastructure projects, training for 44,000 Canadians, $5.8 billion in added EI benefits and $131 billion in business financing.

Bank of Canada Governor Mark Carney said, “A powerful and sustained restructuring of the global economy has begun, but the efforts required of us will be historic,” as he called on consumers and businesses to spend and hire. Consumer confidence in Canada rose for the seventh month in September, but fell unexpectedly in the U.S. on job security worries. U.S. home prices rose for the third month in July, but still are down 32.6% from their 2006 peak. In Germany, stocks surged as Chancellor Angela Merkel was re-elected and pledged to form a centre-right coalition.

Markets

A bumpy road to recovery

Early gains in the week were erased on Thursday as weak U.S. manufacturing and jobless data sent stocks lower. It was one year ago that the Dow Jones Industrial Average suffered its biggest point drop ever – but also its largest gain soon after. In the fourth quarter of 2008, the S&P 500 moved 3% in one day a stunning 29 times. The extreme market volatility seen last year has abated, but stocks are expected to remain in a volatile environment as the recovery picks up.

On Monday, Bombardier shares surged when its joint venture in China won a US$4-billion contract to build 80 high-speed trains. Apple’s iPhone will go on sale in China in October for about US$700. The iPhone App Store hit 2 billion downloads, with users buying 6 million apps per day. Mergers and acquisitions continued with Xerox buying Affiliated Computer Services, while Abbott Laboratories will acquire a division of Solvay. Meanwhile, British regulators gave Kraft a November 9th deadline to make a formal bid for Cadbury. In the lead-up to the holiday season, Wal-Mart unveiled a list of 100 toys for $10 each, and Toys “R” Us is hiring 35,000 seasonal employees.

The month in review

September: One year later, recovery intact but fragile

September 15th marked one year since Lehman Brothers declared bankruptcy, setting off the worst financial crisis since the Great Depression. Canada’s economy is recovering faster than previously thought. Nonetheless, the Bank of Canada kept its lending rate at an all-time low of 0.25%, and renewed its pledge to hold rates until mid-2010. Canada’s banks

were ranked the soundest in the world for the second year in a row by the World Economic Forum, while U.S. banks were ranked 108th. Prime Minister Stephen Harper cautioned that while the recession technically may be over, the recovery is extremely fragile. Finance Minister Jim Flaherty insists that it would be a major mistake for developed economies not to continue stimulus.

Federal Reserve Chairman Ben Bernanke said the U.S. recession is technically over, with growth expected to show in the third quarter. The Federal Reserve kept interest rates unchanged at 0.25%, while giving its most upbeat assessment of the U.S. economy in 18 months and voting to end its US$1.45-trillion program for buying mortgage debt three months early.

G20 leads economic cooperation

At London’s G20 meeting, finance ministers agreed the world economy is stabilizing, but recovery is not established enough to start unwinding stimulus programs. Bankers’ pay is at the centre of discussions; Britain’s finance minister says “the party is over” for bankers who were at the heart of “this almighty car crash.” Bank of England Governor Mervyn King revealed that the Royal Bank of Scotland and HBOS had been just hours away from collapsing last October.

Loonie shows strength; gold tops US$1,000

As the Canadian dollar approached 94 cents U.S., the Bank of Canada repeated warnings that economic recovery may be hampered by the strength of the currency, but said it would ignore short-term volatility in its exchange rate. Gold climbed above US$1,000 an ounce as investors sought a hedge against a falling U.S. currency.

Canadian stocks regain October 2008 levels

Markets advanced in September, reaching levels last seen in October 2008. The TSX has gained 50% since its March 2009 low.

Mergers and acquisitions marry superheroes with princesses

Disney will buy Marvel Entertainment for $4 billion in its biggest deal since buying Pixar in 2006, T-Mobile and Orange will merge to create the U.K.’s biggest wireless operator, and Swedish sports car maker Koenigsegg has teamed up with a Chinese company to buy Saab from General Motors. Magna plans to buy a stake in Opel, GM’s European car division, but risks alienating customers VW and BMW. Canada’s biggest IT services player, CGI, surged on takeover speculation after Dell bid US$3.9 billion for Perot Systems, a 68% premium.

Smart phone wars

In technology news, new hardware and an alliance with Facebook could see Nokia catching up with rivals such as Apple and Research In Motion. Apple unveiled an updated line of iPods this month, while RIM’s quarterly profit and outlook fell short of analyst expectations, sending its shares down sharply. Google’s new Internet phone service, Google Voice, is expected to draw scrutiny from regulators.

Alternative energy: changing the tide

Nova Scotia was given the green light to test turbines in the Bay of Fundy. If viable, sea power could meet 10% of the province’s energy needs. First Solar struck a 10-year deal with the Chinese government to build the world’s largest solar field. Solar panels will blanket a desert area larger than Manhattan and generate enough energy to light 3 million homes. A123 Systems, a U.S.-based battery maker for electric cars, jumped 43% in one day after raising US$380 million through an initial public offering.

The big picture

Canada bouncing back, but rates stay on hold

Canada’s economy is recovering faster than previously thought, the Bank of Canada (BoC) said Thursday. Nonetheless, the BoC kept its lending rate at an all-time low of 0.25%, and renewed its pledge to hold rates until mid-2010. Canada’s banks were ranked the soundest in the world for the second year in a row by the World Economic Forum, while U.S. banks were ranked 108^th.

At London’s G20 meeting, finance ministers agreed the world economy is stabilizing, but recovery is not established enough to start unwinding stimulus programs. Finance Minister Jim Flaherty said, “We agreed that we are not out of the woods . . . We must all remain focused on fully implementing our stimulus packages.” The International Monetary Fund called Canada’s economic strategy “large, timely, well-diversified and structured for maximum effectiveness.” The IMF raised its estimate for global economic growth in 2010 to 2.5%, from 1.9%. Rating agency Moody’s said on Tuesday that the U.S. government’s triple-A credit rating was safe and that the U.K. and Spain are unlikely to lose their top credit ratings.

Markets

Stocks rise as oil and metals rally; gold breaks $1,000

Rising prices for oil and metals helped push the TSX index to an 11-month high this week and the S&P index extended its gain to five straight days, its longest winning streak since November. Oil prices rose 6% since last Thursday and gold rallied above $1,000 an ounce for only the third time in history. The Canadian dollar surged as high as 93.56 cents, but fell back as investors weighed the risk of central bank intervention.

First Solar struck a 10-year deal with the Chinese government to build the world’s largest solar field. Solar panels will blanket a desert area larger than Manhattan and generate enough energy to light three million homes. Apple chief executive Steve Jobs unveiled a new iPod Nano equipped with a video camera and announced price cuts. In merger and acquisition activity, Telus bought Black’s Photo, adding 113 stores to its retail base; Cadbury rejected Kraft’s merger offer of US$16.7 billion; T-Mobile and Orange will merge to create the U.K.’s biggest wireless operator; and Swedish sports car maker Koenigsegg has teamed up with Beijing Automotive Industry Holding Co. (BAIC) to buy Saab from General Motors.

The big picture

China key to global recovery

The global economic recovery has begun, but sustaining it will require stepping up U.S. exports to Asia, says the International Monetary Fund’s chief economist. In an IMF report, Olivier Blanchard predicted that consumer spending, which accounts for 70% of the U.S. economy, will not return to pre-crisis strength quickly. He called on China to reduce the trade imbalance and import more goods from the U.S.

Federal Reserve Chairman Ben Bernanke declared Friday that the U.S. economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression. The U.S. housing market showed encouraging signs in July. Although new-home construction and permits fell, single-family-home starts remained strong, rising 1.7% in July after a 17.8% surge in June. Sales of U.S. existing homes rose to their highest level in nearly two years as cheaper prices and the availability of tax credits continued to entice buyers. In Canada, inflation is at a 56-year low, with declines in the price of gas, cars and shelter partly offset by higher food costs. With consumer spending remaining weak, some economists say it could take two years of recovery before companies begin to raise prices.

Markets

Stocks tumble, then rebound

World markets rallied following steep losses on Monday, when fresh concerns about a U.S. economic recovery sent indexes around the world tumbling. Stocks rose after a rebound in Chinese equities and an uptick in U.S. manufacturing offset a disappointing weekly jobs report.

Canada is not likely to block sale of Nortel, says the Globe and Mail, since the government is only required to review foreign takeovers for businesses over $312 million – Nortel’s balance sheet assets are $149 million. Oil is on track for a strong gain this week as the price per barrel approaches the highest levels since October 2008 when it closed at $75.22. The $US 3 billion cash-for-clunkers program will shut down on Monday, the government said Thursday. As of Thursday, the program has recorded more than 457,000 dealer transactions worth $1.9 billion in rebates. Meanwhile, Hyundai Canada will offer up to $1,000 on clunkers traded in for new vehicles. Ten months after its initial rescue deal with UBS, Switzerland sold its 9% stake in its largest bank for US$5.1 billion, making a profit of US$ 1.1 billion on its investment.