Daily Market Commentary
April 23, 2008
After 50 bps out of the Bank of Canada, the Canada bonds yawned and limped out the rest of the day with mild gains. The big winner on the day was in the credit space. We are finally seeing some improvement in the highest quality credits. Canada Housing Trust bonds saw marked improvements and provincial bonds traded relatively higher on the day as well.
However, this morning, amongst more losses in the financial services space, the TED spread is wider, still at a dizzying 185 as US T-Bills are still very expensive. The market is not convinced that a recovery in the spreads on financial corporates is warranted.
Ambac reported a huge loss as it added $2 billion into loan loss provisions for home-loan debt. UBS also posted its biggest loss ever, and plans to trim down its investment banking division. These types of decision confirm our belief that the recovery will be slow in the financial sector. The worst may or may not be over, but we find it hard to see the case of an immediate return to fat profit margins and high ROE's as lending standards are getting tighter and investment banking business is declining. The Wealth Management division of UBS, is doing well and this has sparked debate about the wisdom of combining wealth, asset and investment banking under one roof.
This hasn't stopped new money from pouring into financial paper. ML, Goldman, Citi, JPM, CIT and Lehman have all raised billions in April, and that's just the US names.
Variable rate mortgages have once again proven to be the winners. The banks were slow to react, but they eventually followed suit with the Bank of Canada and lowered prime rates to 4.75%. We'd like to think that a polite call placed by Mark Carney to remind the banks of their cushy protected oligopoly encouraged them to lower their rates.
Canada's Retail Sales are out this morning, and they are lower than expected, having dropped 0.7% in February after a strong January. Loonies are a little weaker on this news, and short Canada bonds are being bid up. The language accompanying the BoC's cut yesterday, while near term hawkish, indicated with no uncertain terms that the Bank is worried about the downside of the economy. Even if they indicated a pause in the cuts could be warranted here, they clearly indicated that their bias was still to cut. We suspect they probably knew this retail sales number in advance...
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