How V-shaped rebound has morphed into fears of a 'W'
Evening Update: North American stocks climb back from steep losses, Canadian dollar and sink. Plus, Magna to build new plants. And, Dell to launch iPad rival
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Stories Report on Business is following today:
Markets, dollar, euro slump
Global stock markets sank, the Canadian dollar and oil slumped, and the euro continued its descent today as Spain became the new flashpoint for Europe's ever-deepening debt crisis and tensions between South Korea and North Korea sparked new anxiety for investors. North American stocks, however, climbed back from their steep losses later in the day.
Asian and European stocks began the ugly trading day with declines on concerns over solvency in Spain's financial sector, following the weekend seizure of a Spanish bank. The S&P/TSX composite TSX-I, Dow Jones industrial average DJIA-I and S&P 500 SPX-I followed overseas markets down before coming back.
The Canadian dollar slipped almost a penny to close at 93.46 cents U.S.
"Investors are in a 'sell-everything-but-the kitchen-sink' mood," said BMO Nesbitt Burns economist Sal Guatieri.
Anthony Grech, the chief of research at IG Index, said European markets settled somewhat, with some support emerging but no rebound, after an "early bout of what can perhaps best be described as carnage" in stock markets.
"Traders are still struggling to find any real conviction to buy into the market and it could take some time for this sentiment to recover," he said. "The fundamentals we've seen today have certainly been upbeat - [Britain's first-quarter gross domestic product] was revised higher and U.S. consumer confidence is at a two-year high as well - but with the uncertainty on the Korean peninsula and that ongoing question over which European country will be next to flag up difficulties, the caution is completely justified." Read David Berman's Market Blog: Now that was a rebound [http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-close-now-that-was-a-rebound/article1580566]
FMSTART Cat:e528746c-3414-401a-b14b-50247e3bdf01Forum:d0fa4e14-88d2-41f9-8a19-896bdff9544b FMEND
Some observers fear new slump
Europe's troubles have sparked fears of a double-dip recession in some quarters as investors and economists worry about what the harsh austerity measures unveiled by several countries will mean to economic growth.
The bearish David Rosenberg, chief economist with Gluskin Sheff + Associates, said in a research note today that the V-shaped global recovery, a sharp rebound as the letter suggests, is "now starting to look like a W."
Citing data from the Economic Cycle Research Institute, Mr. Rosenberg said: "After swining wildly on the back of the massive fiscal and monetary stimulus from -29.87 per cent on Dec. 5, 2008, to +28.54 per cent on Oct. 9, 2009, the ECRI leading economic index (smoothed) has slumped all the way back down to 9 per cent in the May 14 week (down from 12.15 per cent the week before in what was the steepest one-week slide on record). At 9 per cent, it is back to where it was last July when the S&P 500 was hovering near the 900 mark. In the past 30 years, there has only been one other time when the index fell this far over such a time span and it was during the depths of despair in 2009."
In a warning to investors, Mr. Rosenberg added that "the downdraft in the market in recent weeks reflects the financial risk related to the European debt crisis, the monetary tightening in China and the re-regulation of the financial sector that is currently making its way through to Congress. The next leg down in the equity market specifically and cyclical assets more generally is economic risk."
CMC Markets analyst Michael Hewson noted that bank borrowing costs, measured by Libor, are at their highest levels since last July on concerns over Europe's banking sector. He also cited the bite of the continent's austerity measures. "These actions have spooked markets, and raised fears of a probable double-dip recession," he said.
Others believe that while Europe's debt crisis is troublesome, the recovery still remains on track.
"There are several reasons why this new threat to global recovery will probably fall short of becoming a worldwide recessionary shock," James Bullard, president of the Federal Reserve Bank of St. Louis, told an audience in London today. "Sovereign debt crises have been with us for many, many years. There is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy."
Shoppers in California
Consumer confidence rises
Though Europe is melting and markets are sinking, consumer confidence in the United States is rising. Consumer confidence measured by The Conference Board in the U.S. jumped in the latest reading to its highest level since March of 2008 as people gain faith in an improving jobs market.
The reading is key to the U.S. recovery given the weight of consumer spending in the economy. And the "expectations" measure today "translates to about 2.5 per cent real consumer spending growth rate over time," Credit Suisse said.
"I'll admit it. I'm shocked. But in a good way," said BMO Nesbitt Burns senior economist Jennifer Lee. "U.S. consumers were the most confident in over two years in May, a month that saw the European debt crisis heat up and drag U.S. stock markets down to correction territory after a huge rally. "But confident they were." Read the story [http://www.theglobeandmail.com/report-on-business/economy/us-consumer-confidence-rises-in-may/article1580027]
U.S. home prices rise on year
U.S. home prices were virtually flat in March compared to February, but rose 2.3 per cent from a year earlier, just slightly below what economists had projected, according to the S&P/Case-Shiller Home Price Index released this morning. While U.S. home prices are still under pressure, and were poor on a month-over-month basis, on a quarterly measure the widely followed index showed the first year-over-year growth since the third quarter of 2006.
"This has the same feel as yesterday's existing home price data - the housing price correction appears essentially over," said Jonathan Basile, vice-president of economics at Credit Suisse Securities in New York. "Sustained home price recovery will go a long way in turning very depressed home selling conditions around. For perspective, selling conditions tracked home sales better than buying conditions during the housing downturn."
Germany may widen shorting ban
Germany is considering extending the ban on naked short selling that drove markets into a tizzy earlier this month. A draft proposal from the country's finance ministry today indicates that widening the "ban on naked short selling of shares, including derivatives referring thereto," would help stabilize markets. Sources told the Reuters news agency an extended ban, if implemented, was intended to apply to all shares traded in Germany.
Investors sell short by selling borrowed securities in hopes of buying them back later at a lower cost. The more controversial naked selling involves selling securities before ensuring they can be borrowed. Read the story [http://www.theglobeandmail.com/report-on-business/germany-set-to-extend-short-selling-ban/article1579985]
What is naked short-selling?
Boyd Erman explains
Download (.mp3) [http://beta.images.theglobeandmail.com/archive/00654/what_is_naked_short_654382a.mp3]
EU to propose bank tax
A new European levy on banks could be unveiled tomorrow, the chief of the European Commission said today. Jose Manuel Barroso will propose a new tax on Europe's banks to help fund possible bailouts in the future. Mr. Barroso said the EC will unveil a proposal for a fund "financed by the banks themselves in order to minimize the cost to taxpayers of an orderly resolution of insolvent banks."
The idea of a bank tax promises to be a divisive issue at the upcoming G8 and G20 summits. There is a mounting campaign for a global levy, which Canada has strongly opposed. Read the story [http://www.theglobeandmail.com/globe-investor/eu-to-outline-bank-levy/article1579934]
Italy to unveil cuts
Though today's focus is so far on Spain's banking problems, markets will soon turn their attention to Italy, where Prime Minister Silvio Berlusconi's government plans to unveil an expected €24-billion in spending cuts. Yesterday, Britain's new coalition government announced the measures it would take to trim its budget deficit, and Mr. Berlusconi's cabinet will meet in Rome this evening to approve its package.
Italy has vowed to bring its deficit back into line with the EU's limit of 3 per cent of gross domestic product and "wants to send a message that it is committed to keeping its public finances in order," UniCredit SpA senior economist Davide Stroppa told Bloomberg News.
Related: Europe takes knife to spending [http://www.theglobeandmail.com/report-on-business/economy/europe-takes-knife-to-spending/article1579101]
Geithner confident on yuan
U.S. Treasury Secretary Timothy Geithner says he's confident that it's in China's best interests to allow its currency to appreciate. After meeting in Beijing yesterday with President Hu Jintao and other officials, Mr. Geithner told Bloomberg Television today that the Chinese leader made "a very strong commitment to continue the broader reform agenda." The U.S. and other countries have pushing China hard to allow the yuan to rise, and the Chinese leader said yesterday Beijing would do so in time, but at its own pace.
Magna to build two plants
Magna International Inc. MG.A-T plans to spend up to $600-million (U.S.) to build two new plants, one in North America and the other in Europe, to produce lithium-ion batteries.
Magna's co-chief executive officer Siegfried Wolf told reporters in Vienna today that the auto parts giant is hunting for locations for the plants, which would produce batteries for electric cars. He also told Globe and Mail auto writer Greg Keenan that production could begin by 2012 or 2013. Read the story [http://www.theglobeandmail.com/globe-investor/magna-eyes-sites-for-battery-plants/article1579943]
Potash outlook dimming?
UBS Securities Canada is taking a dimmer view of the potash sector. Analysts Brian MacArthur and Don Carson this morning cut their outlook for Potash Corp. of Saskatchewan POT-T and Agrium Inc. AGU-T, also reducing their 2011 potash estimates as price increases "have been slow to materialize."
UBS cut its 12-month price target on Potash Corp. to $113 from $116, and its target on Agrium to $83 from $80.
They noted, however, that "corn prices appear to be bottoming and could see support from the emergence of China as an importer of corner and a potentional increase in the ethanol blend rate this summer. Improving corn prices would be highly supportive to [nitrogen, phosphate and potash] prices and fertilizer shares as corn is the primary fertilizer consuming crop in the U.S."
Dell to launch tablet computer
Dell Inc. DELL-Q is launching a tablet computer that will compete with the already popular iPad from Apple Inc. AAPL-Q The PC maker said today it will begin selling the Streak next month in Britain, a tablet that will operate on the Google Inc. GOOG-Q Android system, with a 12.7-centimetre screen. The company said in a statement it will hit "the sweet spot" between traditional smart phones and bigger screen tablets.
From today's Report on Business
Special report on executive compensation: Pay moderate but set to rise [http://www.theglobeandmail.com/report-on-business/managing/executive-compensation-set-to-rise/article1579453]
Ottawa puts hefty price on emission standards [http://www.theglobeandmail.com/report-on-business/ottawa-puts-price-tag-on-vehicle-emission-laws/article1579448]
For some on Wall St., a small sigh of relief [http://www.theglobeandmail.com/report-on-business/for-some-on-wall-st-a-small-sigh-of-relief/article1579537]
'Relatively solid' bank results forecast [http://www.theglobeandmail.com/globe-investor/relatively-solid-bank-results-foreseen/article1579490]