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'Optimism crushed': Fears whip loonie, stocks, oil, gold

These are stories Report on Business is following Thursday, Aug. 4. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Markets tumble What began as an ugly morning turned into a brutal day on global markets, as fears over a stalling recovery sank stocks, currencies, oil and even gold.

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"Any sort of risk sensitive asset just got the boots put to it," said David Watt, senior fixed income and currency strategist at RBC Dominion Securities, whose report to clients on the day's action was aptly titled "Optimism crushed on risk aversion spike."

The S&P/TSX composite index , the S&P 500 and the Dow Jones industrial average all plunged, while the Canadian dollar lost about 1.7 cents to close at $1.0209 U.S.

Oil and gold also slipped, with few places for investors to hide.

Investors worry the global recovery has stalled - some fear the possibility of a double-dip recession in the United States - amid extreme uncertainty in this post-crisis era. The markets have been jittery for some time now, and it's as though the penny dropped for investors in earnest today.

"It's clear that everyone's extremely nervous," said Jennifer Lee, senior economist at BMO Nesbitt Burns.

Feeding today's fire were the ongoing debt troubles in Europe, where leaders of the 17-member euro zone have failed repeatedly to put a lid on their crisis, and the continuing fears over the U.S. economy.

Japan's move to intervene in currency markets, to hold down the value of the yen, also added fuel to today's chaos. That scared currency speculators, pushing up the U.S. dollar, said chief currency strategist Camilla Sutton of Scotia Capital.

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(Unfortunately for him, today happens to be President Barack Obama's 50th birthday. According to The Wall Street Journal, some friends flew in from Chicago, and burgers were being done on grills outside the West Wing. His campaign also sent out e-mails from Michelle Obama saying: "Every day, I see Barack make choices he knows will affect every American family. That's no small task for anyone – and more proof that he's earning every last one of those gray hairs.")

Safe havens fight back As RBC puts it today, the world's safe haven countries have had it, and they're fighting back to hold down their currencies.

Less than a day after the Swiss National Bank surprised markets by cutting interest rates to curb the strength of the franc, the Bank of Japan intervened in currency markets today to sell the yen and keep it in check.

"The safe havens are tired of being safe havens," said Elsa Lignos, senior currency strategist with RBC in London. "... You don't want to be the Number 1 safe haven."

As The Globe and Mail's Brian Milner reports today, Switzerland battled back yesterday against investors who had driven the franc up sharply amid the mounting turmoil in the global economy. Today, Japan followed suit.

As Ms. Lignos noted, this isn't a new front in the recent currency wars - the moves are not aimed at competitive devaluation - but rather attempts to hold down values that threaten exports at the worst possible time, when the recovery is slowing.

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For Japan, the rise in the yen comes not only amid a global slow patch, but also as the country struggles to rebound from the devastating earthquake and tsunami of mid-March.

Central banks stand pat The European Central Bank and the Bank of England both held their key rates steady today as the fiscal crisis in the euro zone spreads, the ECB adding it bought government debt and will take other special measures, as well.

The ECB kept its policy rate at 1.5 per cent, and the Bank of England stood pat at 0.5 per cent. Today's do-nothing meetings by the central banks comes as evidence mounts of a slowing recovery, and sovereign debt concerns take centre stage in Europe and the United States.

In Europe, Greece, Portugal and Ireland have already collapsed, and the focus has now shifted to the larger economies of Italy and Spain.

ECB chief Jean-Claude Trichet, who is set to retire in the fall, gave a nod to the troubles when he spoke later to reporters, citing the "renewed tensions" in the markets. However, he still cited concerns over inflation.

"So are they going to raise rates again this year?" said senior economist Jennifer Lee of BMO Nesbitt Burns.

"The ECB has one more meeting (September) to signal a rate hike at the meeting after (October). The October meeting just so happens to be Trichet's final one at the helm and, given the continued concerns about inflation (remember what their mandate is!), we still expect one more rate hike before the end of the year. However, given renewed concerns about financial markets, the odds for a rate hike have eased somewhat."

Kraft to split Kraft Foods Inc. is splitting into two companies, separating the snacks from the Mac and Cheese, if you will.

The global food giant said today it plans to spin off its North American grocery business to shareholders, a unit with estimated revenue of some $16-billion (U.S.). The snacks business that remains has estimated revenue of $32-billion.

"We have built two strong, but distinct, portfolios," said chief executive officer Irene Rosenfeld.

"Our strategic actions have put us in a position to create two great companies, each with the leadership, resources and strong market positions to realize their full potential. The next phase of our development recognizes the distinct priorities within our portfolio. "

It was only last year that Kraft acquired Cadbury PLC, fattening up a company with some of the best known brands in the business, from cheese to Maxwell House coffee.

BCE profit dips Canada's BCE Inc. today posted a 2.5-per-cent dip in second-quarter profit, though earnings were largely what analysts had projected, Globe and Mail telecom writer Iain Marlow reports.

The country's largest communications company earned $590-million or 76 cents a share, compared to $605-million or 76 cents in the same quarter last year.

Revenue climbed to $4.95-billion from $4.4-billion as BCE added more than 94,000 net wireless subscribers, many of whom are on smart phones.

"While the company had a strong showing in terms of smart phone subscriber penetration, cost of acquisition and retention has escalated, putting pressure on margins," said analyst Maher Yaghi of Desjardins.

Airlines doing better Canada's two major airlines are posting better second-quarter results.

Air Canada said today its loss for the quarter narrowed to $46-million, or 17 cents, diluted, from $318-million or 20 cents a year earlier. Operating earnings climbed to $73-million from $47-million.

WestJet , in turn, posted a sharply higher profit of $25.6-million, or 18 cents a share, compared to $6.8-million or 5 cents a year earlier.

However, Air Canada chief executive officer Calin Rovinescu warned of what lies ahead in terms of fuel prices and costs.

"We estimate that these higher fuel prices will add approximately $800-million to operating costs in 2011, based on 2010 capacity and net of the impact of foreign exchange," he said in a statement.

"In an attempt to mitigate the impact on Air Canada's 2011 results, we continue to explore additional cost reduction opportunities beyond those identified through our cost transformation program, to increase fares and fuel surcharges where competitively feasible, and to make adjustments to capacity as required."

Canadian Natural profit jumps The beat of the energy companies goes on.

Canadian Natural Resources Ltd. said today its second-quarter profit climbed to $929-million or 85 cents a share, basic, from $651-million or 60 cents a year earlier.

The company set it met its production targets despite "challenging conditions" that included wildfires and flooding in Western Canada, and that repairs at its Horizon project are almost done.

"With the Horizon rebuild and repairs now essentially complete and commissioning underway, we look forward to additional cash flow generation for the remainder of 2011," said chairman Allan Markin.

Yellow Media sinks to loss Yellow Media Inc. slashed its dividend today as it sank to a loss and announced it will no longer give shareholders some financial forecasts.

The company cut its annual dividend to 15 cents from 65 cents as it seeks to regroup and fix its balance sheet. It has already sold its Trader Corp.

The company said it lost $14.3-million in the quarter, a sharp reversal from a profit of $52-million a year earlier, as revenue slumped almost 5 per cent to $342.7-million from $360.1-million.

"As we had expected, [Yellow Media]finally decided to face reality and cut its dividend significantly, which should allow the company to improve its financial debt ratios substantially," said analyst Maher Yaghi of Desjardins.

"While this cut will reduce market speculation about the company's short- to medium-term financial sustainability, we believe that unless EBITDA is stabilized this move will provide only temporary relief. Given the lower margins and the continuing negative trends in key operational metrics, we do not believe the shares offer an attractive entry point, even at these levels."

In International Business today Rio Tinto missed forecasts today despite a record first-half profit, as escalating costs and currency movements blunted the effect of robust metals prices, Mark Bendeich and Clara Ferreira-Marques of Reuters report from Sydney and London.

In Economy Lab today As global events of the past few weeks have shown beyond any reasonable doubt, whether we like it or not, our economic well-being is inextricably tied to economic and political happenings beyond our expansive borders. William Polushin takes a step back and re-examines Canada's position in the global economy.

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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