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Daily Market Commentary

Despite a very strong bond market during the end of the day yesterday, the real story was in the credit spreads yesterday.  In particular the banks were jumping all over the board.  Following the downgrade of ACA, CIBC spreads gapped wider and is now trading anywhere from 0 to 30 bps wider than Royal, TD and BNS depending on the term.  BMO, having also gapped out wider than the comparables late last week, is also at a discount to the other banks.  If you're one of the people that thinks insolvency is a possibility, 30 bps would hardly suffice for your extra risk.  This trading is most likely in anticipation of the ratings agencies starting to take a closer look at CM, after downgrading ACA.  Companies that have large exposure to that (and other troubled insurers) will require close monitoring.  We would still think that insolvency is pretty unlikely, but there will be plenty of pain in credit spreads if downgrades come down the pipe to any of the banks.



GDP came out this morning in line with expectations.  Q3 saw a gain of 4.9%, up from Q2.  This number seems big, but remember it's backwards looking - we're more worried about where we're going than where we've been.  Weekly jobless claims were also out this morning, so I thought it's about time to reproduce the claims chart (see Daily FI Snapshot), last updated a month ago.  We're worried about the bottoming pattern shown on the jobless claims.  Remember employment is still one of the  bright spots of the economy, despite housing pain, credit woes and slowing spending.



Bear Stearns joined the subprime write down parade this morning, to the tune of $1.9 billion, causing them to post a large loss on the quarter.  The write-down was larger than most were expecting (consensus was $1.2 billion), but forecasting that number is more art than science.  Bear gets about half its revenue from fixed income, and much of that in the residential lending space (mortgage bonds of all flavours), so it has felt a relatively large amount of pain compare to other Wall street I-Banks, as indicated by its chart.  Having taken almost a 50% haircut this year, the market was certainly expecting some bad news from this quarter.


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