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Markets: 'The fear factor has reached boiling point today'

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Market fears gather steam Investors around the world bloodied the markets today, driving down stocks, many commodities and currencies as fears continue to mount over prospects for the global recovery.

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Weak signs from the United States, Japan and Britain, and lingering concerns about Europe, all fed into the widespread stock selloff.

The Dow Jones industrial average , the S&P 500 and Toronto's benchmark S&P/TSX composite all sank, following major European markets that plunged by up to just shy of 6 per cent. U.S. bond yields also dropped.

The turmoil played out in currency and commodity markets, as well, moving currencies like the Canadian dollar , which sagged, and benchmarks like oil , which also sank, and gold , which hit a fresh record.

Along with U.S. inflation and home sales data today, the Federal Reserve Bank of Philadelphia's manufacturing index heightened concerns with a July reading that plunged to a negative 30.7 in August from a positive 3.2 a month earlier. The Philly Fed index looks at the mid-Atlantic region of the United States.

"August's horrible U.S. Philly Fed manufacturing survey and July's existing home sales data will only exacerbate the renewed sense of jitters currently taking hold of the financial markets," said Paul Dales, senior U.S. economist at Capital Economics in Toronto.

"The plunge in the headline index of the Philly Fed survey, to -30.7 in August from +3.2 in July, was simply awful. It leaves it at a level last seen in March, 2009, when the U.S. was last in recession ... Meanwhile, the 3.5-per-cent month-over-month fall in existing home sales in July, to 4.67 million from 4.84 million in June, shows that the housing market will not save the U.S. economy. "

Adding to the angst was a report from Morgan Stanley that warns the United States and Europe are at risk of sinking back into recession.

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"Traders and pundits alike are rightly scratching their heads to try and decipher the root cause of this latest big selloff," said Will Hedden, sales trader at IG Index.

"The euro zone crisis keeps giving birth to small news stories, add these all together and for one reason or another the fear factor has reached boiling point today," he said in a research note.

"Banking stocks have been decimated across Europe, with indiscriminate selling even in banks that maintain their exposure to the crisis is slim. No sector is surviving this tidal wave of selling, and the fact that financials are first in the firing line will only lend support to the anti-short-selling-ban camp."

HP plans transformation Hewlett-Packard Co. is poised for a huge transformation.

The world's biggest computer maker said late today it struck a £25.50-a-share cash deal - that's $42.11 (U.S.) or more than $10-billion - to acquire Britain's Autonomy Corp., a software firm.

At the same time, HP is looking at "strategic alternatives" for its PC business that could include a spinoff of the unit. HP said it also plans to ditch operations for its webOS devices, notably the TouchPad and webOS phones.

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"Autonomy presents an opportunity to accelerate our strategic vision to decisively and profitably lead a large and growing space," said HP's chief executive officer Léo Apotheker.

"Autonomy brings to HP higher value business solutions that will help customers manage the explosion of information. Together with Autonomy, we plan to reinvent how both unstructured and structured data is processed, analyzed, optimized, automated and protected. Autonomy has an attractive business model, including a strong cloud-based solution set, which is aligned with HP's efforts to improve our portfolio mix. We believe this bold action will squarely position HP in software and information to create the next-generation Information Platform, and thereby, create significant value for our shareholders."

HP also posted preliminary results for its third quarter, reporting that revenue climbed to $31.2-billion from $30.7-billion a year earlier. Earnings per share came it at 93 cents.

It also estimated fourth-quarter revenues of $32.1-billion to $32.5-billion, and full-year sales of $127.2-billion to $127.6-billion, down from its previous projection for the year. Estimates for annual earnings per share are also down, to a range of $3.59 to $3.70, compared to its earlier forecast of $4.27.

U.S. consumer prices climb Inflation is back on the radar in the United States, but it's not likely to push the Federal Reserve to do much differently.

Consumer prices climbed 0.5 per cent in June from a month earlier, according to the U.S. Labor Department today, a reversal from the 0.2-per-cent dip a month earlier. It's also the fastest increase since March. So-called core prices, which exclude volatile items, were more muted at 0.2 per cent.

On an annual basis, prices rose by 3.6 per cent, though the core rate was at 1.8 per cent, slightly higher than the previous month's reading. Playing into today's showing was the fact that energy prices increased 2.8 per cent in July after a hefty drop a month earlier.

Today's numbers feed in the growing angst over the state of the U.S. and global economies, and what central banks like the Federal Reserve can do about it.

"Energy prices rose 2.8 per cent against expectations for a cooler reading, with the CPI not yet capturing the evident downtrend in gasoline prices, and food was still climbing a further 0.4 per cent," said Avery Shenfeld, chief economist at CIBC World Markets. "But core was better behaved, and in any event, inflation is not the pressing issue these days."

Senior economist Jennifer Lee said the inflation reading will "add ammo" to those at the Federal Reserve who dissented at the last meeting, but won't change the path of the central bank.

U.S. jobless claims rise The number of Americans filing initial claims for jobless benefits is on the wrong side of 400,000 again, illustrating the severity of the jobs crisis in the United States.

Claims rose last week by 9,000 to 408,000, according to the U.S. Labor Department today.

A four-week rolling average shows a dip, but still above 400,00.

"The job market has not worsened significantly, but it hasn't improved that much either," said BMO's Ms. Lee.

In Canada, the latest numbers are little changed. The number of people collecting regular EI benefits stood in July at 577,400, Statistics Canada said today, after declining for eight months in a row.

Compared to a year earlier, the numbers are down by more than 18 per cent, the federal agency said.

Japan trade suffers Among the softer economic readings today is one that shows Japan's trade suffering. Exports from Japan and imports to the country were both weaker than expected, leaving a trade surplus of ¥72.5-billion.

"The persistent strength in the yen is no doubt having some impact on the figures as well, with the currency averaging its best level on record in July," said Mr. Reitzes of BMO Nesbitt Burns.

"Unfortunately for Japanese exporters, policy makers are reluctant to provide the consistent intervention necessary to reverse the yen's recent gains. Indeed, barring a policy shift, we expect the yen to remain strong through the rest of this year as global economic uncertainty persists amid sovereign debt worries."

There are also reports that a key Japanese finance official met today with policy makers at the Bank of japan and agreeed to work together to deal with the rising yen.

"The market is on intervention alert and if [U.S. dollar versus the yen] is not materially higher within the next 24-48 hours, the market may call the officials' bluff and test the March low," said Adam Cole, global chief of foreign exchange strategy at RBC in London.

New exchange Goldman Sachs Group Inc. is creating yet another stock market in Canada, adding to the competition for the exchanges run by TMX Group Inc. , Streetwise columnist Boyd Erman reports.

Goldman said today it will bring its SIGMA X system to Canada. The SIGMA X market in Canada will be a so-called "dark pool" that will let buyers and sellers anonymously trade stocks that are listed on the Toronto Stock Exchange.

S&P being probed Standard & Poor's can't seem to get out of the eye of the storm.

The New York Times reports today that the U.S. Justice Department is probing the ratings agency's handling of mortgage securities in the run-up to the financial crisis.

The investigation, the newspaper says, was launched before S&P cut the U.S. government's triple-A rating and sparked some controversy.

A spokesman for S&P told the newspaper it has received several requests over the past few years from various government agencies, and "we continue to co-operate with these requests."

Mosaid surges after bid Shares of Mosaid Technologies Inc. surged today in the wake of an unsolicited, $480-million bid late yesterday from Wi-LAN Inc. .

As The Globe and Mail's Omar El Akkad reports, Wi-LAN plans a $38-a-share offer that would marry two of the country's biggest patent-licensing companies.

Mr. Sub being swallowed There's not a lot of corporate news out there today, and this hardly counts as a big deal, but fast-food lovers in Ontario take note.

MTY Food Group Inc. , which operates and franchises more than 1,700 outlets, is buying the assets of Mr. Submarine Ltd. for $23-million.

"With three out of four Mr. Sub outlets being street front locations, the transaction will reinforce MTY's presence on the street," the company said.

In International Business today It's a seductive idea that just won't go way: Taxing the massive volumes of financial transactions sloshing around the global economy. But will it fly? The Globe and Mail's Barrie McKenna and Boyd Erman examine the proposal by France's Nicolas Sarkozy and Germany's Angela Merkel.

In Economy Lab today If Canada could eliminate its deficit in the 1990s, why can't the U.S., Britain and other countries do so now? Unfortunately, it's not that simple, Stephen Gordon writes.

From today's Report on Business

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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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