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Markets 'stuck between wanting to panic and cheap valuations'

These are stories Report on Business is following Tuesday, June 12, 2012.

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Markets tentative
Investors are tentative today as Europe simmers.

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As Sébastien Galy of Société Générale put it, markets are "stuck between wanting to panic and cheap valuations."

Too many questions remain about the proposed €100-billion Spanish bank bailout, markets are anxious in the run-up to the Greek election this weekend, and there are still concerns over the outlook for China's economy. And, as our European correspondent Eric Reguly writes in today's Report on Business, investors are also keeping a wary eye on Italy.

"'Fragile' is perhaps the most appropriate word to describe sentiment at present," said sales trader Ben Critchley of IG Index in London.

"Yesterday's trading showed that even €100-billion is not sufficient to rebuild battered investor confidence, and Spanish and Italian yields are creeping higher once again," he said in a research note.

"A warning from Fitch this morning about Spain's deficit reduction efforts reminded investors that the underlying problems in the Iberian economy are far from being fixed, with the ratings agency saying that Madrid will miss its deficit targets for 2012 and 2013. Italy of course is never far away when we consider Spain's situation; add Greece into that mix and you have a dangerous combination."

Tokyo's Nikkei slipped 1 per cent, and Hong Kong's Hang Seng 0.4 per cent, while European and North American markets made tentative gains.

"The fashionable thing will be to see if the market can push Spanish and Italian bonds close to their critical levels, where the fiscal budget becomes unsustainable," said Mr. Galy.

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"To really go through we will need a deterioration on the political front that only Greece can provide with its vote. It is part and parcel of European politics that someone will throw a spanner in the Spanish rescue package and it would be odd not to expect it."

He was referring to the vote that could well determine whether Athens remain part of the 17-member euro zone. Remember, anti-austerity forces made huge gains in the last election, which left no clear winner and forced a second vote. That camp wants to undo the harsh terms attached to Greece's international rescue.

Markets are frustrated by a lack of concrete action by Europe's leaders, whose divisions run deep. There have been calls for euro bonds and a so-called banking union that would spread the risk around, but Germany, pressing its case for fiscal discipline, objects to both. Until there's something definitive, markets are sure to remain in a fragile state.

Hiring outlook fades
The hiring outlook among Canadian employers has ebbed to a two-year low, and weakened in many other countries too, suggesting turmoil in Europe is chipping away at confidence, The Globe and Mail's Tavia Grant reports today.

A quarterly hiring outlook from Manpower shows Canadian hiring intentions for the July-to-August period are softer than the prior quarter and now at the lowest level since the third quarter of 2010.

Manpower's survey shows the weakest hiring plans are in education and manufacturing of non-durable goods (such as food, clothing and paper). Hiring plans are, once again, brightest in the West, while they are more cautious in Atlantic Canada.

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Brookfield to build new tower
Brookfield Office Properties is pushing ahead with a second tower at its Bay Adelaide Centre in the heart of Toronto's financial district, naming Deloitte as its anchor tenant today.

Deloitte has signed for 420,000 square feet, or almost 45 per cent of the what will be Bay Adelaide Centre East.

The tower will be 44 storeys, and 980,000 square feet in total, and is expected to be built by late 2015 or early 2016. The west tower opened in 2009, and is 95-per-cent leased.

Brookfield says that timeline coincides with the expiry of several large office leases in the financial area.

"Strong fundamentals and low vacancy in Toronto's financial core signify the market's willingness to support new office development," said Jan Sucharda, chief executive officer of Brookfield Office Properties' Canadian commercial operations.

Watch Bombardier
Shares of Canada's Bombardier Inc. climbed today after the announcement late yesterday of what's being called the biggest private order in airline history.

Bombardier is getting a piece - and it's a big piece - of an order by NetJets for up to 425 new business business jets worth just shy of $10-billion (U.S.).

NetJets, owned by Warrent Buffett's Berkshire Hathaway Inc., says it plans to buy up to 275 Challenger 300 and 605 series jets from Bombardier, The Globe and Mail's Bertrand Marotte reports. One hundred of those are firm, and there are options for a further 175.

It will also buy up to 150 Cessna Aircraft Co. Citation Latitudes, 25 of them firm orders and 125 on option.

Analyst Benoit Poirier of Desjardins said the order "confirms Bombardier's strong market leadership." He has a price target of $6 and a "buy" rating on the stock.

"We estimate that Bombardier had a total backlog of 69 Challenger aircraft at the end of Q112 (10 months of production, and the new order will add 100 aircraft to the backlog (26 months of production; management targets 15-18 months," Mr. Poirier said.

"We maintain our positive stance on Bombardier despite its disappointing 1Q12 results," he added. "We continue to believe the stock is attractive at current levels, which, in our view, represent a good buying opportunity."

Viterra sees strong quarter
I'm not sure just how much it matters any longer given that it's going to disappear as a publicly listed company, but Canada's Viterra Inc. today posted strong second-quarter results.

The agri-business company, in the midst of being swallowed by Glencore, posted a profit of $67.1-million or 18 cents a share, compared to $30.2-million or 8 cents a year earlier. Revenue climbed to $2.7-billion from $2-billion.

Rosenberg's sounding ... bullish
I'm wondering just what has transformed David Rosenberg. He's almost bullish.

The chief economist of Gluskin Sheff + Associates, one of the world's great bears, says he's the light "at the end of a dark tunnel" and that "the future is brighter than you think." Indeed, by Thanksgiving he could be a "perma-bull."

Now, that has to be put into perspective. Much depends on global developments. And it doesn't mean there won't be another recession.

But it's an important shift for the Toronto economist.

"I'm noticing a certain degree of despair these days, just as I am getting enthusiastic about the future," he says, in the belief that there will be a "clear and coherent" U.S. fiscal plan that will spur capital investment.

"Much depends on what happens on Nov. 6 and between now and then we still have the European mess, China hard landing risks and the U.S. debt ceiling issue to confront," according to his research note.

"Be that as it may, those with some dry powder on hand will have their clients in a solid position to take advantage of whatever forced 'panic' selling takes place … Don't be surprised if I end up turning bullish ahead of the pack - though it may not be until the like of my good friend, Jim Paulsen, is hiding under his desk screaming 'uncle."

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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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