March 5, 2010

Mature Markets

In a statement issued on Tuesday, the Bank of Canada announced its interest to return to more normal interest rate levels. The statement came a day after economic data revealed that the Canadian economy grew at a robust 5% in the last quarter of 2009, exceeding market expectations of 4% and the 3.3% originally forecast by the central bank. In an earlier statement, the Bank of Canada pledged to kept interest-rates at a record-low benchmark rate of 0.25% until July. The risks to the Bank of Canada’s inflation outlook have been considered “roughly balanced” and are no longer “tilted slightly to the downside” and deflation is no longer a concern as prices are increasing to a level that may prompt a response. The Bank of Canada sets interest rates to ensure inflation remains at 2%. Economists expect growth of around 4% in Canada for the first quarter of 2010.

A recently survey by the Federal Reserve (Fed) shows economic recovery continues to spread at a modest pace across the US. The 12 regional Fed banks reported further expansion of economic activity since January. Although the increases were modest and consumer spending is improving, the labor market remains weak. Small businesses manufacturing producing sector, which shed 37,000 workers. However, within that sector employers added 3,000 jobs, recording their first monthly increase in hiring in more than a year. The services sector continued to show renewed strength, adding 17,000 jobs, the second consecutive monthly rise in the sector. 

Greece witnessed strong demand for its new make-or-break bond deal. Athens will borrow €5 billion in 10-year bonds, calming investor fears that the country would not be able to tap the international capital markets because of its deteriorating public finances. Order books rose to about €14bn, making the offer nearly two times oversubscribed, so the Greeks will have to pay very high interest rates.  The coupon interest rate is expected to be 6.4 %, much higher than the existing Greek 10-year bonds, about 2% more than Portugal, and twice that of Germany. Greek equities rose as the markets considered the deal to be a relative success. The Athens General index rose 1.2 % to 2,035.38, outperforming the pan-European benchmark FTSE Eurofirst 300, which remained flat. Greece needs to find around €20 billion in funding over the next three months in order to meet its debt obligations.

Emerging Markets

In a pivotal public address, China’s Premier has announced a growth target of 8% in the economy this year, but also warned that the number of new investment projects – a closely watched indicator of whether policy in China is really being tightened – would be slowed. He also noted “latent risks” in the country’s banking sector, in reference to concerns that lots of money borrowed by local governments last year might not be repaid. The risks of rising property prices, inflation and overheating, partly as a result of the massive monetary stimulus last year, were also mentioned. China was the first economy to make a turnaround from the economic recession, but its recovery was still insufficient compared to stellar growth recorded in the pre-crisis years. To this end, a series of measures to help small and medium-sized companies, including tax breaks and bank guarantee will be implemented in 2010. The Premier made no mention of an imminent move on China’s currency policy, despite strong international pressure for Beijing to appreciate the renminbi, saying the exchange rate would remain basically stable at an appropriate and balanced level. And, despite considerable speculation that the government was preparing a big announcement about reforming the system of residency permits, which would provide more rights to migrant workers in urban areas, little was mentioned on the subject.

Banking & Finance

To shareholders’ discontent, HSBC is in the process of implementing substantial pay raises for top executives, a move which has been previously blocked by investors. HSBC would pay a total of £4.6 billion in pay and bonuses to staff at its investment banking division. The bank announced that three of its top executives earned more than £9 million each last year. The bank’s pre-tax profits fell 24% to $7.1 billion last year as higher loan impairment charges took the shine off strong investment banking performance and a narrowing of losses from the US business.

Market and Economic Research Division
Mazen Soueid
Stephanie Ghanem
Kim Pierce
Ziad Hariri

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