Stocks and Loonie Down

The TSX shed 1.06% and the S&P 500 as well as the NASDAQ gave back around a percent yesterday. The rout was led by financial shares after an announcement from the White House that it will raise USD120 billion (yes, billion) through fees on financial institutions. The announcement was the centrepiece of a ten-year measure at recouping losses suffered by the Troubled Asset Relief Program (TARP), an initiative that the Obama administration claims helped fund over two million jobs in the US during the worst financial crisis in a generation. There has been much criticism of American banks lately, as strong earnings numbers have started to roll in over the last couple of weeks and billions upon billions in bonus payouts were announced. The primary concerns have been that the bonuses equate to lost shareholder value, and that the firms which so desperately needed taxpayer funds to stay afloat not all that long ago have totally missed the lessons to be learned from the last couple of years.

The Loonie gave way to the Greenback yesterday morning after a surprise Canadian trade deficit and softer oil prices. The USDCAD was, however, held up in technical resistance in the high 1.03s by midday and unable to establish itself above the 1.04 level. A trend line established in December thwarted the pair’s ascent from 1.0250. A breakout above this resistance potentially opens the pair up to the 1.0500-1.0525 region, where the 30-day moving average is currently hovering. To the downside, the October 2009 lows between 1.0200 and 1.0250 are likely to provide the strongest short-term support. There is not much in the way of news or data for the Canadian dollar during the rest of the week, so look for the unit to trade in relation to its neighbour to the south and commodity (especially oil) prices. Friday’s US month-over-month Core CPI should prove interesting.

China Roils Asian Equities

Weak North American equities set the stage yesterday for the worst day in Asian stock markets in over a month. Overnight, all the major exchanges in Asia retreated on news out of China and concerns over the survival of Japan Airlines. The Nikkei was off 1.32%, Singapore posted 1.02% in losses, and the Hang Seng retreated a staggering 2.49%. The rush for the door was triggered by an announcement from China that banks will have to hold more in reserves. The announcement added momentum to the already climbing bill yields, effectively increasing the cost of capital in China. In a clear departure from the loose monetary policy of the last year, this effort to contain inflation in the world’s fastest growing economic superpower by controlling economic growth caught some by surprise. While the move was expected, it is a little ahead of schedule, as most economists had predicted this kind of monetary tightening to commence in the spring.

Dragging down Asian shares were Google and, as mentioned, Japan Airlines. Japan’s national air carrier had trading ceased for the second day in a row after its stocks plunged over 80% down to seven yen per share. After four previous financial bailouts in the last nine years, it looks like the Japanese government will support a court-administered restructuring, thus wiping out shareholder value. Newly appointed Finance Minister Naoto Kan stated the government will do “what is necessary” to keep the airline operating.

Google Inc., the world’s most popular search engine, famed for having the informal corporate motto “Don’t be evil,” announced that it will no longer abide by the strict censorship requirements the Chinese government has placed on it, and is contemplating closing the Chinese version of its website and offices. The move comes following news of a “highly-sophisticated” cyber attack against the Google-based e-mail accounts of well-known human rights activists. Google has clashed with the Chinese government for years over censorship and free speech. These most recent attacks, along with similar cyber attacks on about 20 companies by hackers, highlight some of the issues that all international firms, especially technology firms, face in China.

Cable and Euro Touch One-Month Highs

As the European trading day comes to a close and the North American one warms up, both the GBP and the EUR have made comfortable gains on the day. The GBP edged up towards 1.6300, touching its one-month high after an interview with BOE policymaker Andrew Sentance, in which he acknowledged that the central bank was looking at holding back stimulus. The Cable also found support from better-than-expected Industrial Production numbers, and was able to shrug off mildly worse-than-expected Manufacturing Production data. The EUR hit one-month highs against the Big Dollar after traders decided that the surprise monetary policy announcement in China wouldn’t be disastrous for growth and indexes in Europe tip-toed into positive territory. Today’s shift of focus away from debt issues in countries like Greece, Spain, and Portugal was welcome relief for the common currency, which has started this year on the defensive. Also, it was announced today that the German GDP contracted mildly; after a brief selloff, however, the EUR recovered, as traders seemed undisturbed by the news.

On a side note, market players will watch with interest as US earnings, bonuses, and use of TARP funds come into the spotlight again today. Executives from some of Wall Street’s biggest firms are testifying before US congress.

Have a great day.

By David Starkey, FX Trader
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