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Investors in the U.S. seem to be shrugging off all kinds of worries ranging from government spending to political rhetoric over health care and financial reforms.

Not even a slow economic recovery or growing sovereign debt problems in Europe, not to mention an erupting Icelandic volcano, have been able to shake confidence for long.

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The VIX index is a measure of investors' expectations of future volatility based on options trading on the Chicago Board Options Exchange. And it is at its lowest level since mid-2008.

Volatility is low as banks and corporations have reduced leverage, rebuilt their cash positions and raised capital, said Andrew Spence, global head of research for TD Securities. That reduces the level of vulnerability and the scope for volatility, he said during a quarterly update to clients. "The global financial system has been cleansed of vulnerable positions."

While stocks are at fair value, the downside risk is fairly low, Mr. Spence said. He expects interest rates will remain low in the U.S. and that the demand for risk assets such as equities and commodities should stay healthy as the global economy continues to grow.

While there is some scope for market volatility, there is also a risk central banks around the world, including the U.S. Federal Reserve Board, will begin to raise rates sooner than expected. The biggest threat as we move through to the end of the year will be that worries increase over fiscal and monetary policy imbalances with overnight interest rates a long way from equilibrium around the world.

His conclusion: "The scope for policy error is very large and the scope for economic surprises is probably greater than at any time since the 1970s." However, he doesn't expect to see major volatility pick up until early 2011.


Interest rates in the U.S. remain low and the U.S. Federal Reserve Board is unlikely to raise the federal funds rate any time soon, economists say.

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The bottom-line is that the Bank of Canada is departing from keeping its monetary policy closely aligned with the U.S. by indicating last week that it will be raising the target overnight bank rate as early as June. "In other words, there is no question that Canada is now on the path toward materially higher short-term rates, such that [the central bank]will be 75 basis points to 100 basis points 'ahead' of the Fed when the latter gets around to tightening later this year," said Dennis Gartman, editor of the Gartman Letter. (A basis point is 1/100th of a percentage point.)

Some economists are not looking for the Fed to begin raising interest rates until early 2011, although a faster-than-expected recovery could cause it to begin earlier.

Still, the demand for bonds could remain strong. "The continued inflow of money into bond funds from money market mutual funds represents a grab for yield that is unlikely to abate until the Fed begins to tighten some time in 2011," said Steven Ricchiuto, chief economist with Mizuho Securities USA Inc.

The current narrow trading range suggesting yields of between 3.75 per cent and 4 per cent "reflect foreign investor demand for long-duration [U.S.] dollar assets" and "the evidence of deflationary pressures accumulating in the [U.S.]economy," he said.

Paul Ashworth, the senior U.S. economist with London-based Capital Economics Ltd. takes a truly bearish outlook on the economy. Deflationary pressures along with a high unemployment rate might keep the Fed from raising rates until 2012, he said.

The Fed's next rate-setting meeting is this week with the rate announcement scheduled for Wednesday.

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North American steel prices are making an "impressive and rapid march upward," said Frederic Bastien, an analyst with Raymond James Ltd. in an Infrastructure and Construction Report. "In fact, prices for a variety of products in a number of regions have returned to levels not seen since the credit bubble burst in the fall of 2008."

One indicator of the strength in the steel market is the rise in the price of scrap steel. The increase is a result of a slow economic recovery that is yielding low amounts of obsolete and industrial scrap as Americans hang onto their aging appliances longer than ever before, while overseas demand for scrap remains strong because of the weak dollar, he said.

"Scrap steel prices are up 50 per cent year-to-date and an astonishing 18 per cent in the past month alone," Mr. Bastien said.

However, he cautions, the economic recovery is too fragile to support the loftier prices beyond the current quarter, especially as new production starts up in the flat steel market. Flat steel producers are benefiting from stronger demand in the auto and manufacturing sectors. However, steel tubular markets are being adversely affected by weak natural gas prices.

Raymond James has a "market perform" rating on Russel Metals and an "outperform" rating on Gerdau Ameristeel

Recovery in the global steel industry is also reflected in iron ore and coking coal prices. The price of premium-grade hard coking coal bound for Japanese steel mills from Canada will jump to $200 (U.S.) a tonne from $128, spurring mine restarts and capacity expansion in Western Canada by Teck Resources Ltd., Western Coal Corp. and Grande Cache Coal Corp., according to Scotia Capital Inc.

Iron ore prices in Asian markets are up 80 per cent to 90 per cent, it said.

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