The Road To Recovery...

“The path to recovery has narrowed, but the path is still open, if action is taken now.” IMF Managing Director Christine Lagarde

“They need to overwhelm the problem in order to get ahead of the markets.” Canadian Finance Minister Jim Flaherty

BNN has scoured the alphabet for stories and settled on a handful, including the IMF, ECB. EFSF, BOC, UBS, LME and XL. And we thought we’d slip in the G20 for good measure.

IMF officials, G20 finance chiefs and central bankers emerged from a weekend of tense negotiations and media availabilities in Washington DC in full agreement that something must be done. They also agreed that something must be done soon. And they all acknowledged that whatever will be done will be expensive. They could not agree, however, on just what should be done, when it will be done and how much it will cost. Nor could they agree on who would pay. Yet stock markets seem mollified by the seriousness of it all and the fact that the IMF conference of central bankers and finance ministers appear to be narrowing their focus on the various ways the euro-zone bailout mechanism, the EFSF, can be enhanced and deployed. The fund sits at 440 billion euros – though even its current level and use has yet to be ratified by a handful of national parliaments – with some estimating that it may need to swell to 3 trillion euros to get the job done. Other components of a plan that may or may not be taking shape include the recapitalization of European banks (but not the big French banks, mais non!) and a managed Greek default.

That’s Europe, but what about Canada? Over the weekend, Bank of Canada Governor Mark Carneysaid the economy, the Canadian banks and the central bank have all the tools necessary to withstand a worsening global economy. In other words, if the global economy is the Toronto Maple Leafs, then we’re Wendel Clark. But what about the near-term shocks of falling commodity prices and shrinking demand for manufactured goods from the middle of the country? Broad measures of the commodity market have slumped to 10-month lows with the price of oil dropping below $80, copper sinking to its lowest in more than a year and silver erasing its tremendous gains for the year. Gold is falling as some investors sell to cover losses in other assets. Let’s talk about earnings expectations for the materials and energy groups today and whether current share prices are justified as earnings expectations fall.

A key component of our energy coverage this week will be the debate over the Keystone XL pipeline, the proposed $7 billion TransCanada project that would carry Alberta oil sands crude to refineries on the Gulf Coast. Beginning today, the U.S. State Department will hold eight hearings across the six states the 2,700-km pipeline will cross. The opposition is fierce, but the U.S. appetite for energy is insatiable. The safety of the environment is a compelling argument as is the case for thousands of jobs across thousands of miles of U.S. territory. Brett Harris will be on the ground in the U.S. this week for the public hearings. He’ll be doing some live hits this week, and then filing a special series on the pipeline in the coming weeks. He starts in Port Arthur, Texas, today. Then he’s off to Nebraska and Oklahoma.

In Ottawa today, Greenpeace is leading a mass protest, including a sit-in against the oil sands and the pipeline. The protest is expected to be attended by top entertainers and actors such as Dave Thomas. At a protest in Washington DC a few weeks ago, actress Daryl Hannah (who most recently wowed audiences in 1987’s Roxanne) told cameras as she was being escorted away by police that the oil sands were an environmental disaster, the only one that could be seen from space. While that may be true, I would add that, thanks to Google Earth, I can also see my house from space, including a raccoon in my backyard, and it is digging up the new sod.

The London Metals Exchange is fielding takeover offers and we need to find out more. Could a foreign buyer purchase this jewel of the British financial industry? As an exchange that is owned by its 90 or so members, could the government block a takeover even if it wanted to?

In the wake of a $2.3-billion loss from unauthorized trading, UBS CEO Oswald Gruebel resigned over the weekend. His departure throws into turmoil the outlook for one of the cornerstones of the Swiss banking industry. Plenty of angles yet to pursue.

Paul Bagnell is attending a speech by Julie Dickson, Superintendent of Financial Institutions, this morning on the lasting impact of the financial crisis on the Canadian financial system.

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.