Canada’s main stock index ended higher yesterday, led by the financials sector, as investors bought bank shares in anticipation of a better than expected earnings season for Canada’s largest organizations. The Financial sector climbed 2.1% as Canadian banks are expected to report another profitable quarter this week, defying global trends. This spring’s stock market rally is seen offsetting higher loan losses and lower income from interest and fees.
Investors are feeling a little bit better about the Canadian banks and the global banks. The financials have been leading the rally since early March. The S&P/TSX composite index closed up 0.76%. Volumes were thin due to stock market holidays in the United States and Britain.
Oil prices fell toward $61 a barrel on Monday, giving away some of last week’s gains ahead of OPEC’s meeting in Vienna, where the group is widely expected to agree not to cut oil output further. Saudi Arabia warned oil prices could spike to beyond the near $150 record high of 2008 within 2 to 3 years, as energy leaders decried a “blow to investment” in expanding capacity due to the financial crisis. Energy ministers and officials at the Group of Eight (G8) energy summit in Rome are meeting as oil prices hover at a 6 month high of over $60 a barrel, but below the $75 a barrel level producers say is needed to spur investment in new production (that is the problem with oil fields or wells – they do eventually run dry). Saudi Arabian Oil Minister Ali al-Naimi said the world was heading for a fresh spike after the current phase of faltering demand and lower prices, which reflected the global economic downturn rather than an indicator of things to come.
Low prices and weak demand had discouraged investment in energy projects, with high development costs and tight credit markets compounding the problem, Naimi said. Naimi’s warning was echoed by others at the energy summit, with a top IMF official also forecasting price spikes over the medium-term following relatively stable markets in the short-term. “With long time-to-build lags, significant setbacks to oil investment today could set the stage for future sharp price increases,” IMF First Deputy Managing Director John Lipsky said. He said energy investments were likely to remain subdued in 2010, after an expected decline in 2009. The International Energy Agency predicts investment in oil and gas exploration and production will fall 21% in 2009.
As it pertains to the overall investment conditions, things have changed for the better:
1. Systemic banking risk has been reduced, unprecedented government intervention the US banking system has been temporarily stabilized. The results of the US Treasury “stress” tests are finally behind us and some financial institutions are now able to raise capital without government guarantees. Not surprisingly, a few US financials institutions have requested government approval to repay TARP funds.
2. Depression is no longer part of the investment debate, as noted from our US Economics team, an economic depression is no longer “on the table” with most economic forecasters. “Near-zero interest rates, quantitative and credit easing (QE & CE) by central banks, combined with fiscal expansionism (stimulus packages) have cut off the worst of the possible economic downside risks investors collectively feared in early March.
3. Capital levels are adequate, the results of the US Treasury “stress” tests are behind us (for now), with roughly $75 billion in capital required.
This morning stocks and U.S. index futures fell, with the MSCI World Index retreating the most in 3 days, while the yen and the dollar strengthened on concern that risk to economic growth and global political stability are increasing. North Korea fired two short range missiles a day after a nuclear test and missile launches sparked international condemnation. Standard & Poor’s 500 Index futures dropped 0.6%. Oil also fell on speculation OPEC will not cut production quotas at a meeting this Thursday (as much as 3%).
After the run up in stocks we have seen since March it is quite possible that we have some stock market price consolidation that will allow the economy to catch up to current stock prices. Unemployment is still greater than 8% in the United States, which is the first time since 1983 we still see the economy contracting, home prices continue to fall but all these measures are declining or contracting at a slower pace thereby, suggesting that they will bottom out at some point in 2009 thereby, providing some ‘green shoots for stock markets.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
