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Markets surge on aggressive steps by central banks, China

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Markets surge It's as though the stars aligned this morning.

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Co-ordinated action from the world's major central banks and a move by China to ease policy, coupled with other optimistic news, drove global markets sharply higher today.

While Asian markets slipped, European bourses surged, followed by the S&P 500 and Toronto's S&P/TSX composite .

The Canadian dollar went along for the ride.

It didn't start that way. There was something of a sour mood in the markets after yesterday's move by Standard & Poor's on the major U.S. banks, and the realization that the euro zone wasn't going to be able to do what it set it out to do in terms of its bailout fund.

But an easing of reserve requirements for China's banks turned the markets around, followed by the announcement by major central banks that they were acting in concert to ease the strains on the global financial system.

Added to that was a decent jobs report in the United States. And just to put the icing on the cake, a fresh reading from Statistics Canada showed the economy rebounded at a better-than-expected pace in the third quarter.

Central banks in co-ordinated move The world's politicians may not be able to get their act together, but the major central banks can.

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The central banks of Canada, the United States, the euro zone, Britain, Japan and Switzerland moved in today to ease the pressures on the global financial system, which is tossing and turning over developments in Europe.

"The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity," the Bank of Canada said in a statement.

Starting next week, the central banks will drop the rate they charge to exchange U.S. dollars for other currencies by half a percentage point, The Globe and Mail's Kevin Carmichael reports from Washington. The new charge for "swaps" will be half a percentage point above the U.S. dollar overnight index swap, or OIS.

Economy rebounds Canada's economy rebounded in the third quarter of the year - and at a faster pace than expected - as gross domestic product expanded by an annualized 3.5 per cent after the second quarter's slump.

Today's report from Statistics Canada was better than expected. Economists had anticipated growth in the range of 3 per cent.

The expansion was pushed along by a surge in exports and a push in residential construction, Statistics Canada said. But growth in consumer spending slowed amid high unemployment, fat household debt and global uncertainty.

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But the outlook isn't as strong as the third-quarter data.

"An unsatisfactory pace of job growth – zero net gains in employment since July – in combination with weakening consumer confidence and ongoing losses in equity markets are expected to slow the pace of spending growth over the next few months," said economist Diana Petramala of Toronto-Dominion Bank.

"Meanwhile, global economic growth is slowing substantially, led by a likely deep recession in Europe and moderating economic growth in China. Canada will be negatively impacted through weak commodity prices and slower export growth. Overall, economic growth is expected to average sub-2 per cent over 2012, a pace that will likely keep inflationary pressures in check and the Bank of Canada on hold through next year. "

Outlook for Europe grim Despite this better news, the outlook for Europe still grows bleaker by the day.

As finance officials continue to wrangle in Brussels today over the steps necessary to save their monetary union, the people on the streets are suffering.

In Spain, for example, fresh data today shows the jobless rate has hit almost 23 per cent. In Greece it's more than 18 per cent, in Italy 8.5 per cent, and in the euro zone as a whole 10.3 per cent. And one has to question how much higher those rates will go as embattled governments scramble to cut further and deeper in their rush to bring down their deficits.

"Look for the uptrend to continue," warned Benjamin Reitzes of BMO Nesbitt Burns.

Greece, for example, is deep in recession, and, as The Associated Press reports today, the ranks of the homeless are growing.

"Up until now people that were facing psychological problems or addiction problems were the main population of homeless people," charity worker Athanasia Tourkou told the news agency.

Now the profile is changing and we see people with a very high education level, people (who) up until a few months ago had a house, a regular job, were living with their families. And now they're on the streets."

China cuts requirements The People's Bank of China moved today to ease reserve requirements among the country's banks, cutting the ratio by half a percentage point. Beijing has been making inroads in its fight against inflation, and now is moving to support economic growth by spurring bank lending.

"More important though is the signal this gives to the markets and to investors," said Mark Williams, chief Asia economist at Capital Economics in London.

"The PBC could have achieved the same end of loosening constraints on credit growth quietly through its open market operations. The fact that it chose to act in this more public way is a signal not only that policymakers are loosening but that they want to be seen to be doing so. Accordingly, we see this as a decisive shift in policy stance from China. Further reserve requirement cuts will follow over the next few months."

China had been moving forcefully against inflation, raising rates and the reserve ratio aggressively.

"This may well be your China soft landing in play as we've been discussing with clients who are more focused upon hard landing risks," said Derek Holt of Scotia Capital.

"Yes China has investment and housing excesses and risks a sharp slow down, but what is forgotten is that no other country has the capacity to ease like China has and to do so within the confines of a uni-party state and a style that lacks transparency or short-term rationing roles played by the cost of capital," he said in a research note.

"The hard landing camp, in my opinion, simplistically erred by assuming that a uni-party state would be asleep at the switch as growth downsides become evident through higher frequency manufacturing and housing metrics ... This hardly solves the world's problems on a risk-trade bias that will be pressured for a long time yet, but it's a pro-active positive step in the short run."

Competition watchdog raises TMX concerns TMX Group Inc. and the financial institutions poised to take over the stock exchange operator have a selling job on their hands.

As The Globe and Mail's Tim Kiladze reports today, the Competition Bureau says it has "serious concerns" about the proposed deal, the latest in the long-running love triangle saga surrounding TMX, which first called off an agreement with London Stock Exchange Group PLC and then opted for the banks, insurers and others that make up the Maple Group.

As Streetwise columnist Boyd Erman writes, it's not surprising that the antitrust watchdog has concerns. But the depth of its issues may be.

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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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