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Fed fallout: Gold dealt ‘killer blow,’ Canadian dollar tumbles

These are stories Report on Business is following Thursday, June 20, 2013.

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Markets slump
Stocks are slumping, the Canadian dollar is down sharply, and gold is suffering from a "killer blow" as the market rout sparked by Ben Bernanke continues today.

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Also troubling investors is a fresh reading on manufacturing in China.

As The Globe and Mail's Kevin Carmichael and Brian Milner report, this all began yesterday afternoon after the chairman of the Federal Reserve laid out a timeline for when it could begin to pull back from its extraordinary stimulus program known as quantitative easing, or QE.

That's a bond-buying scheme, aimed at driving down interest rates and worth some $85-billion (U.S.) a month.

Investors want to be sure that the economy and the markets can withstand a pullback before the U.S. central bank eases up.

Thus, Mr. Bernanke's suggestion that the Fed could begin to withdraw, likely this fall, and end the program completely next year is playing with the nerves of investors.

"Ben Bernanke has put the cat well and truly among the pigeons with his statement that asset purchases would begin slowing by the end of this year," said sales trader Yusuf Heusen of IG in London.

"It does feel as if the Fed chairman has pulled the rug from underneath the stock market rally, and he certainly seems to have dealt a killer blow to gold," he added in a research note.

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The reason for a pullback is that the Fed sees a somewhat brighter economic outlook.

"The U.S. economy might be getting better but this will be cold comfort for investors today," Mr. Heusen said.

"Until the dust settles, it is hard to say where the latest bout of selling will end."

Indeed, the fallout is widespread, from stocks to currencies to commodities.

The Canadian dollar tumbled to 96.32 cents U.S. by mid-afternoon, down almost 2 cents from the 98.20 of 1:30 p.m. yesterday, before the Fed unveiled its policy decision and Mr. Bernanke guided markets on what to expect in terms of QE.

That's because the Fed chief's statements drove up the U.S. currency, rather than anything specific to the loonie, as the dollar coin is known in Canada, noted chief currency strategist Camilla Sutton of Bank of Nova Scotia.

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"By affirming what most people already knew - that the U.S. economy faces fewer downside risks than last fall (e.g., it didn't fall off the fiscal cliff, the government didn't shut down, and the euro zone didn't break up) and the Fed doesn't need to keep pressing on the gas when the economy speeds up - the comments have the market contemplating an early tapering and ending of QE3," added senior economist Sal Guatieri of BMO Nesbitt Burns.

"Our view is that tapering will begin in the fall and end in the spring."

Stocks immediately sank and Treasury yields climbed in the wake of Mr. Bernanke's news conference. Adding to the angst today was a new measure showing manufacturing activity in China slipping to its lowest in nine months.

Asian markets, spared yesterday's woes because they were closed at the time, tumbled today, while major European exchanges were hit hard. That carried into North America, hitting the S&P 500, the Dow Jones industrial average and Toronto's S&P/TSX composite.

Gold was hammered, plunging below $1,300 an ounce to its lowest level in about 2 and a half years. Silver prices also sank, as did oil.

"The $1,300 level on the gold price represents a key support level over the last five years, given that it represents a 50-per-cent retracement of the entire up move from the 2008 lows at $680 to the all-time highs at $1,915," said senior analyst Michael Hewson of CMC Markets.

"Demand for the yellow metal has been in decline for several months now, not helped by import taxes imposed by India which continues to see fairly good demand, despite falling prices," he added.

Potential suitors eye Maple Leaf
Maple Leaf Foods Inc. promises to be one of the next takeover targets in the rapidly consolidating food products sector, The Globe and Mail's Jacquie McNish reports today.

Industry sources say a number of international companies are eyeing potential acquisitions of all or some of Maple Leaf's meat and bread product divisions.

One of interested buyers was U.S. meat processor Smithfield Foods Inc. Earlier this month, though, Smithfield agreed to be acquired by China's Shuanghi International Holdings Ltd. for $4.7 billion (U.S.).

It is understood that a number of U.S. and Asian food companies including U.S. food producers Kraft Foods Inc., Hormel Foods Corp. and Mexican baked goods company Grupo Bimbo have been actively searching for acquisitions.

Consumers start to get financial houses in order
Canadians are getting richer – can you feel it yet? - and are getting a better handle on their debts.

Net worth among Canadian households climbed 1.9 per cent in the first quarter of the year, pushed higher by stronger stock markets, Statistics Canada said today. It's now at a record $7.2-trillion.

On a per capita basis, household net worth rose 1.7 per cent to $204,800, the federal agency said.

At the same time, the debt burden among consumers is easing from what had been dangerous record levels.

The key measure of household debt to disposable income declined to 161.8 per cent in the first three months of the year, from 162.6 per cent a year earlier.

That marked the second quarterly dip in a row, and follows the urgings of the Bank of Canada and the federal government, which has moved four times over the past several years to tame the mortgage market.

Borrowing for mortgages rose at the slowest rate since early 2009, Statistics Canada said, and was offset by lower demand for other types of consumer credit.

Mortgage debt in Canada now stands at about $1.1-trillion, and other consumer debt at $496-billion.

"The improvement in the indicators of Canadians' financial position are likely to please policy makers and help to alleviate the concerns over the risks excessive household indebtedness pose for the financial system," said economist David Onyett-Jeffries of Royal Bank of Canada.

"Accordingly, the pressure on the Bank of Canada to counteract these risks by tightening monetary policy is easing," he said in a research note.

"With price pressures remaining limited, we expect that the central bank will keep financial conditions accommodative through the remainder of this year and into next in an effort to support a faster pace of expansion in the Canadian economy."

Demand for office space changing
CBRE Ltd. is warning developers that, with a plethora of new office towers being built in Canada, demand for office space is starting to wane.

That could spell the end of a period of high rents and exceptionally low vacancies, The Globe and Mail's Tara Perkins reports.

So far, tenants have been signing up to prelease a lot of space in the new towers, but CBRE says market conditions are changing.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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