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Daily Market Commentary

After yesterday, it appears all is well with the world.  Huge gains in equities were offset by sales in bonds.  Credit spreads recovered a little bit as risk taking returned and some of those were considered oversold.  We'd agree that spreads in corporate land were overdone, particularly on the "fringe" of credit.  There are many issuers, such as the Canadian agencies and the provinces, which are considered "credit".  That means they trade at a certain yield premium over Canada bonds.  While the default risk of a province or an agency (which is backed by the Fed government) is miniscule, these yields continued to climb as investors shunned anything except straight Canada credit.  There now appear to be some great values in the provincial and agency world, as well as some selected credit.


  Financials, especially US issuers in CAD$ like HSBC, Citi, Merrill are trading at large discounts to their Canadian counterparts.  Some of these are short in term and duration, and yielding over 5%.  Check out BondOne for offers.


  Caution is still warranted though.   The broad measure of credit risk, the TED (Treasury - EuroDollar) spread - which measures banks willingness to lend amongst themselves - is trading near its highs from early August at 228 bps.  LIBOR is still well above the Fed Funds rate.  The institutions in the market place are still VERY hesitant to lend, and we worry this could have very negative implications on the overall economy should it continue.



  Q3 GDP came in as expected in the US, at 4.9% annualized.  This is a huge number when markets are screaming for Fed rate cuts, but remember this is backwards looking data compiled from July to September.  The credit crisis began in August, so forecasts are much lower.  Jobless claims, which are much more up to date data, came in above expectations.  We're still very worried that jobless claims are forming a bottom and heading higher  (see chart in Daily FI Snapshot)



Canadian industrial product prices fell, mostly thanks to our strong dollar, although raw materials prices rose.  Our current account, most importantly, dropped precipitously from last month's reading.  It is at its lowest level since June 2003, and makes us wonder why our dollar continues this strength.





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