Fed responds in a big way

The chase by Marty Cej:

The U.S. Federal Reserve was more aggressive than anticipated yesterday, selling $400 billion US in short-term Treasuries to fund purchases at the long end in a bid to drive yields lower, and indicating it will reinvest the proceeds from maturing agency debt and mortgage-backed securities into MBS. But an aggressive move by the Fed at a time of great economic worry can cut two ways: it is a signal that the Fed stands ready to stoke the economy with all the fuel it's got, and it's also a signal that the economy is in such bad shape that it needs to be stoked with all the fuel the Fed's got. The markets appear to be focusing on a single, telling sentence in the Fed's statement, that there "are significant downside risks to the economic outlook, including strains in global markets." Those strains are our focus today.

A quick glance around the globe shows Hong Kong's Hang Seng plunging 4.9 percent and Japan's Nikkei dropping 2.1 percent; the broad Euro Stoxx index is down 3.8 percent while benchmark indices in London, Frankfurt, Paris and Stockholm are down 3.8 percent or more.

The Canadian dollar is plunging against the U.S. dollar and is the hardest hit among the G10 currencies this morning. At last check, the loonie is down a little more than 2 cents at 97.17 cents US, its lowest since October 2010. Yesterday, we said to keep an eye on the Canadian dollar because of the particularly large short position in the U.S. dollar against the loonie -- that warning appears to have been well-founded. It is important to note, however, that all of the G10 currencies are down against the U.S. dollar as the Fed's dovish statement and evidence of cooling economies in China and Germany prompt a flight to the perceived safety of the U.S. dollar. The question is whether this is the start of a longer trend in currency markets.

In commodities, the price of oil has dropped a little more than 4 percent to $82 a barrel, gold has slumped $52 or almost 3 percent and copper, considered the most economically sensitive of commodities, has plunged 5 percent and is now technically in a bear market. We need to talk again about what the simultaneous decline in gold, base metals and oil says about the global economy and the outlook for markets.

A series of reports on the manufacturing sectors of China, Germany and other European countries compounded economic worries overnight with HSBC's China Flash PMI showing the factory sector shrank for a third straight month. Business activity in Germany, meanwhile, grew at its slowest pace in more than two years in September and new orders fells for a third month.
In Europe, the CEO of BNP Paribas, France's biggest bank, is denying reports that he is seeking a Middle Eastern investor to help prop up its capital. Baudouin Prot said a few minutes ago in a radio interview in France that he "formally denies" a Reuters report that he has been in talks with Qatar's sovereign wealth fund and that "we don't need a capital increase." BNP Paribas also said that it will be cutting jobs in its investment banking business.

Worries of a credit freeze between European banks and between European banks and their corporate customers continue to grow.
We will zero in on the threat of a global credit crisis with Europe at its nexus with Rick Waugh, President and CEO of Bank of Nova Scotia. Waugh sits down with Howard Green for a half an hour of conversation at 1:00 pm ET.

We'll talk about the challenges facing European banks and how they are likely to impact Canadian banks and Canadian financial conditions. As the most global of Canadian banks, Waugh has insight unique among his peers. This is one you'll not want to miss.
It is worth noting that Canadian bank stocks are outperforming all of their major world peers but are at a 32 percent premium to the MSCI World Bank Index. Do Canadian banks deserve that much of a premium, and will it last?

But what about companies? Some, like United Technologies, see cheap debt and falling share prices as opportunities to grow and prepare to take advantage of the next upswing in economic growth. United Technologies agreed to buy Goodrich Corp. for $16.5 billion, or $18.4 billion including debt. UTX will finance about 25 percent of the deal with equity and the rest with new debt. When it costs nothing to borrow, why not?

We're watching BCE and Rogers after the CRTC said the companies can't offer TV programs exclusively to their mobile-phone and internet subscribers. UBS analysts call the decision "widely anticipated" and "unlikely to have any significant immediate impact on the industry." We'll see whether the market agrees.