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• Pedestrians are reflected on an electronic stock indicator of a securities firm in Tokyo Monday, Nov. 21, 2011. Japan’s Nikkei 225 index fell 0.1 percent to 8,365.04 in the morning session as Asian stock markets headed lower Monday as a change of government in debt-laden Spain and Singapore’s warning of a sharp growth slowdown underlined the challenges facing the world economy. (AP Photo/Shizuo Kambayashi)

By Pamela Sampson, The Associated Press

BANGKOK – World stock markets fell Monday as a change of government in debt-laden Spain and warnings from Asian officials of a sharp growth slowdown underlined the challenges facing the world economy.

Benchmark crude fell below $97 per barrel and the dollar strengthened against the euro but slipped against the yen.

European shares fell in early trading. Britain’s FTSE 100 slipped 1.2 per cent to 5,300.67. Germany’s DAX slumped 1.5 per cent to 5,715.68 and France’s CAC-40 slid 1.3 per cent to 2,956.66. Wall Street also appeared headed lower, with Dow Jones industrial futures falling 0.9 per cent at 11,659 and S&P 500 futures down 1.2 per cent at 1,199.80.

The Nikkei 225 index in Tokyo fell 0.3 per cent to end at 8,348.27, its lowest closing since March 2009, after Japan announced an unexpected trade deficit for October.

Hong Kong’s Hang Seng was 1.4 per cent lower at 18,225.85. South Korea’s Kospi dropped 1 per cent to 1,820.03. Australia’s S&P/ASX 200 fell 0.3 per cent to 4,163. Indexes in Singapore, Taiwan and Indonesia were also lower.

Mainland Chinese shares fell slightly, with the benchmark Shanghai Composite Index inching down less than 0.1 per cent to 2,415.13, its lowest close in almost one month. The Shenzhen Composite Index also was virtually unchanged at 1,031.50.

Market jitters were in evidence a day after Spain voted in a new government — the third time in as many weeks that Europe’s debt crisis has toppled an administration. Governments in financially troubled Greece and Italy have also fallen.

Spain dumped its ruling Socialist government Sunday for the conservative leadership of Mariano Rajoy, who inherits an economy wracked by debt and an unemployment nightmare — which at more than 21 per cent is the highest among the 17 nations that use the euro.

Rajoy also must lower Spain’s soaring borrowing costs with deficit-reducing measures while preventing an already moribund economy from heading into a double-dip recession.

Adding to pessimism, Chinese state media reported Vice Chairman Wang Qishan, who oversees trade and finance, predicting on the weekend that current global economic problems are likely to be long term.

Singapore on Monday warned that its economy will likely suffer a sharp slowdown next year as export demand from developed countries wanes. Because of its high reliance on trade, Singapore is often a bellwether for the rest of Asia.

Japan, meanwhile, said its exports fell for the first time in three months in October, eroded by a strong yen and a sputtering global economy.

“Japan has been in focus after swinging back to a trade deficit in October as its trade balance figures missed expectations this morning,” Stan Shamu of IG Markets in Melbourne said in a report. “The news has seen Japan’s exporters come under pressure.”

Mazda Motor Corp. lost 5.1 per cent, Honda Motor Corp. fell 2.2 per cent, and Panasonic Corp. lost 2 per cent. South Korea’s LG Chem Ltd., which makes batteries for electronic cars, lost 4.3 per cent.

Stocks that are heavily dependent on exports to the West have come under pressure recently, said Linus Yip of Hong Kong-based First Shanghai Securities. Hong Kong clothing retailer Esprit Holdings slipped 4.8 per cent. China Merchant Holdings, a major port operator, fell 2.1 per cent.

“The market right now is still worried about future economic growth, the European debt problem,” Yip said.

Energy and resource shares were hit hard by the uncertain outlook for the global economy. Hong Kong-listed China National Offshore Oil Corp., known as CNOOC, fell 3 per cent. China Coal Energy was down 4.9 per cent while Energy Resources of Australia lost 3 per cent. Japanese energy explorer Inpex Corp. fell 2.6 per cent.

Mainland Chinese shares in textiles and railway infrastructure companies led the gains while shares in coal miners and environmental protection companies weakened.

“Earlier forecasts on credit easing haven’t actually come true and the situation in Europe is also affecting sentiment here,” said Li Jianfeng, an analyst at Caida Securities, based in Shanghai.

Jinxi Axle Co. gained 5.7 per cent while China South Locomotive & Rolling Stock gained 2.1 per cent after reports citing an expert said a bullet train crash in July was largely due to management problems rather than technical issues.

Gains were muted on Wall Street on Friday. While the Conference Board’s index of leading economic indicators rose more than Wall Street analysts were expecting — a sign that the economy may pick up in the coming months — many investors were cautious as a key Congressional committee remained deadlocked on ways to cut the U.S. budget deficit.

A bipartisan panel must agree on making at least $1.2 trillion in deficit cuts by Wednesday. If the committee fails and Congress takes no other action, automatic spending cuts will take effect beginning in 2013. Economists worry that a deadlocked Congress will erode business confidence and slow the already fragile U.S. economy.

The Dow Jones industrial average gained 0.2 per cent to close at 11,796.16. The Standard and Poor’s 500 lost less than 0.1 per cent to 1,215.65. The Nasdaq composite slid 0.6 per cent to 2,572.50.

Benchmark crude for December delivery was down $1 at $96.65 a barrel in electronic trading on the New York Mercantile Exchange on Monday. The contract fell $1.41 to finish at $97.41 per barrel on the Nymex on Friday.

In currency trading, the euro fell to $1.3462 from $1.3518 late Friday in New York. The dollar weakened to 76.79 yen from 76.97 yen.

Canadians can get their hands on the country’s newest banknotes Monday — $100 bills made from a plastic polymer designed to last longer and thwart counterfeiters.

Bank of Canada governor Mark Carney will be on hand at an afternoon ceremony in Toronto to formally launch the bills.

First announced in June, the bills are a departure from the current cotton-and-paper bills in circulation because they feature the latest in anti-counterfeiting technology.

Counterfeiting became a major problem between 2001 and 2004, when it peaked at 470 fake bills for every one million in circulation. Since then, officials have been able to use new technology to get that figure down to only about 35 fake bills for every one million in circulation today.

INTERACTIVE ‘Secure’ plastic banknote unveiled Zoom in and find out security features

To fight that, the new bills have two transparent windows built into them that make them difficult to forge but easy to verify. One extends from the top to the bottom of the bill and has holographic images. Another window is in the shape of a maple leaf.

There is also transparent text, a metallic portrait, raised ink and partially hidden numbers throughout.

Price of safety enormous in world of low interest rates

Retiring today with financial security is challenging. Courtesy of central banks, interest rates are at levels not seen since the Second World War. Then, ultra-low interest-rate policies abetted wartime funding needs. Today, central banks are promising a lengthy period of minuscule rates in a frantic effort to stave off the slumps and deflation that often follow on the heels of a credit crisis.

In this world of artificially low interest rates, the price of safety is enormous. Not only are nominal rates paltry, but net of inflation, Government of Canada bonds yield a negative real return. High-net-worth investors who hold bonds in non-registered accounts also face the bite of taxes.

A back-of-the-envelope calculation illustrates how devastating this combination is for wealthy retirees withdrawing funds from their portfolios. Start with $3-million. Assume a 2% nominal return less inflation of 2% and taxes of 1% and the portfolio will lose 1% a year in real terms. Now assume a 4% withdrawal rate based on the original capital value, and by the end of year one the real value of the portfolio is $2,850,000. If ultra-low rates drag on for the next three years, a possibility, the real value of the capital will fall to $2,545,850. A stunning erosion of more than 15% of capital in just three years.

It’s not just the wealthy who are caught in this squeeze. Every conservatively invested RRIF holder faces escalating taxable distributions that all but guarantee a spiral of ever-falling real wealth. In today’s artificial world, the price of safety for many retirees is the heightened risk of outliving their money.

Retirees facing serious capital depletion have hard choices – accept more investment risk in the pursuit of higher returns, cut spending or both. In my experience, many retirees don’t find these options very palatable and simply hope the issue goes away. Hope, however, is not a strategy. The prudent course of action is to develop both a diversified investment plan and a budget that reflects today’s harsh reality.

On an investment front, an appropriate exposure to equities is critical. Fortunately, unlike the state of affairs a decade ago when ludicrous stock valuations offered little in the way of future returns, stock valuations are reasonable today. Our firm recently forecast a long term, expected real return from global stocks of 6.3% a year – only modestly below the 6.6% annual real return of U.S. stocks since 1926.

Adding equity exposure is just one way of improving a portfolio’s expected return. Provincial government bonds yield more than Government of Canada bonds, as do investment-grade corporate bonds. Bear in mind, though, that this return premium is not a free lunch – these bonds do have greater credit risk and are more volatile. Alberta, for example, defaulted on its bonds in the 1930s. Canadian investment-grade corporate bonds lost more than 4% in September and October 2008 when the financial tsunami hit.

Preferred shares are another option. Currently yielding over 5%, most preferred shares pay eligible dividends that have a lower tax bite due to the dividend tax credit. Due to their higher yield and lower taxes, preferred shares offer a real-return opportunity to taxable investors. Investors need to keep their heads up on the risk front. Preferred shares, which have higher credit and liquidity risk than bonds, lost 16.9% in 2008. Still, this was about one-half the loss of common shares.

Investors can also diversify and seek higher returns through real estate investments. These include both mortgage investment corporations and real estate investment trusts. On the risk front, REITs lost nearly 50% in 2008 while the shares of publicly traded mortgage investment corporations dropped over 20%.

Every financial storm ends; higher interest rates will eventually return. Until then, however, retirees face some hard choices.

z Michael Nairne, CFP, RFP, CFA, is the president of Tacita Capital Inc., a private family office and investment-counselling firm in Toronto.

OTTAWA — Federal Finance Minister Jim Flaherty is expected to release his fall economic update on Tuesday in Calgary —and he’ll likely confirm the government won’t meet its 2014-15 target for eliminating the deficit.

The Conservative government, Bank of Canada and parliamentary budget officer have all downgraded their economic projections over the past few weeks, and Tuesday’s fall update will reflect the sluggish forecasts.

Flaherty is expected to deliver the refreshed fiscal outlook during a speech to the Calgary Chamber of Commerce, and it’s believed he’ll confirm the government won’t be able to meet its target for balancing the books.

The finance minister announced two weeks ago that, based on the average projections of 15 private-sector economists he regularly consults, the government was trimming the country’s economic forecast for the next few years.

Flaherty predicted Canada won’t sink back into recession unless it experiences a “dramatic shock” from the European debt crisis that continues to threaten the global economy.

But at the time, he hinted the government would not be able to balance the books by its target, and instead would look to eliminate the projected $32.3-billion deficit over the “medium term.”

Tuesday’s economic statement likely will update the government’s revenue and spending projections, including whether the forecast deficit for this year has changed.

The Tories are in the midst of an ongoing strategic operating review that is searching for $4 billion in annual cuts.

Flaherty has a number of tools at his disposal, including: slowing the spending cuts; developing a broader jobs plan such as opposition parties are demanding; or delaying planned corporate tax cuts.

Another option, which Postmedia News has learned the government will take advantage of, is to increase employment insurance premium rates.

However, the increase will not be as much as some had anticipated.

The government is reducing the EI premium increase from a planned 10 cents for employees to five cents, and for employers it is cutting the increase from 14 cents to seven. Fifty per cent cuts in expected increases for next year.

The general corporate income tax rate is slated to fall to 15 per cent on Jan. 1, 2012 from the current 16.5 per cent.

Political observers and economists aren’t expecting dramatic changes from Flaherty’s economic update, and aren’t certain now is the time to make any bold moves.

“The level of uncertainty is just too high to leap dramatically in one direction or another. I think we’ll see a fair degree of caution,” predicted Roger Gibbins, president of the Canada West Foundation, a Calgary-based think-tank.

“The update will sort of signal caution going into the spring budget without committing the government to anything dramatic in terms of either cutbacks or stimulus.”

The government is wise to protract its timeline for balancing the books if the economic signs demand it, Gibbins added, saying now is not the time for the Conservatives to be dogmatic in their deficit fight.

“Sometimes promises deserve to be broken in light of changing circumstances,” he said.

The Conservative government now forecasts real GDP growth in Canada at 2.2 per cent in 2011— down significantly from the 2.9 per cent projected in March.

The economic outlook for 2012 is also noticeably weaker than initially forecast, with real growth in gross domestic product now expected at 2.1 per cent next year, compared to 2.8 per cent projected in March.

The level of economic growth in 2013 also has been trimmed, down to 2.5 per cent from 2.7 per cent projected earlier this year.

“We need to maintain the fiscal track to get back to balanced budgets. So we intend to stay on course to get to a balanced budget in the medium term,” the minister said two weeks ago, upon delivering the updated GDP numbers.

The government has vowed to be “flexible and pragmatic” to maintain economic growth in Canada, but has continued to resist NDP calls for potentially billions of dollars in stimulus spending to spur job growth in Canada.

Last week, Canada’s parliamentary budget officer predicted slower economic growth and higher unemployment in Canada than the Harper government, saying the country’s books probably won’t be balanced until 2016-17 at the earliest.

The slower-than-expected growth is likely to increase unemployment to eight per cent in 2012 and 2013 (compared to 7.4 per cent this year), which translates into 100,000 more unemployed Canadians by next year, according to the parliamentary budget officer.

It will also generate smaller federal tax revenues and larger budget deficits — making it almost impossible for the government to meet its target of balancing the books by 2014-15, the report said.

Flaherty, however, disagreed with the assessment, saying last week, that Canada is well on its way to eliminating the deficit.

“We are on track, we are seeing modest growth in Canada this year. This is relatively good,” Flaherty said.

OTTAWA — Canada’s economy gained momentum for the third straight month in August as output in the energy sector expanded at the fastest clip in eight months, confirming expectations of solid third-quarter growth.

Gross domestic product climbed 0.3% from the previous month as oil and gas extraction surged, Statistics Canada said on Monday, beating market expectations of 0.2% growth. Year-on-year growth was 2.4%.

Statscan’s revised data showed monthly GDP grew 0.4% in July. On a quarterly basis, GDP shrank 0.4%, annualized, in the second quarter but the central bank and private sector economists predict a rebound in the third-quarter with about 2% growth.

Other contributors to growth in August were the finance and insurance sector, retail trade and construction. Sectors that shrank included manufacturing, wholesale trade, utilities and some tourism-related industries.

Both the Bank of Canada and the government sharply cut their growth forecasts last week for this year to about 2% from closer to 3% previously.

Statscan will release its quarterly GDP figures on Nov. 30. Quarterly data is expenditure-based while the monthly GDP data is based on industry output.

© Thomson Reuters 2011

http://business.financialpost.com/2011/10/31/canadas-growth-tops-forecasts/

Canada ranks as the top country among 134 major developed nations for business, according to the annual Best Countries for Business survey by influential business magazine Forbes.

The move from fourth in 2010 to top billing is based on a ranking of 11 different factors – including property rights, taxes, freedom of trade, money, corruption, innovation, investor protection and market performance. According to the survey, Canada is the only country to score in the top 20 consistently in 10 of those metrics.

“As an affluent, high-tech industrial society in the trillion-dollar class, Canada resembles the US in its market-oriented economic system, pattern of production and affluent living standards,” the report says.

Canada is lauded for avoiding the financial meltdown that has seen banks teetering perilously in the U.S. and Europe since 2008, for tax reform, mostly with the introduction of the Harmonized Sales Tax in Ontario and British Columbia, and for its ability to maintain a lower unemployment rate than its trading partners. In fact, in terms of overall tax burden, Canada ranked ninth in 2011, up from 23rd in 2010.

“During the run-up to every U.S. presidential election, countless Americans threaten to move to Canada if their preferred candidate does not emerge victorious,” declared Forbes. “Of course, few follow through with a move north. Maybe it is time to reconsider.”

While the U.S. is “paralyzed by fears of a double-dip recession and Europe struggles with sovereign debt issues,” Canada’s economy held its own, the report gushes. “Canada enjoys a substantial trade surplus with the US, which absorbs about three-fourths of Canadian exports each year.”

The unemployment rate of 7.3% in Canada compares favourably with the U.S. rate of over 9% and the eurozone unemployment rate of 10%.

Even economic expansion, projected at 2.4% but down from last year’s 3.1%, is heralded.

While many Canadians have a love-hate relationship with their banks, the folks at Forbes are unequivocal in their adoration. “Canada’s major banks, however, emerged from the financial crisis of 2008-09 among the strongest in the world, owing to the financial sector’s tradition of conservative lending practices and strong capitalization.”

The other countries rounding out the top 10 are New Zealand, Hong Kong, Ireland, Denmark, Singapore, Norway, the United Kingdom, and the U.S, at 10th spot, down from ninth in 2010. The culprit in 2011: the U.S. surpassed Japan as having the highest corporate tax rate among major developed countries.

Three African countries – Burundi, Zimbabwe and Chad – bring up the rear among the 134 nations ranked, all faring poorly mostly because of corruption and red tape.

© Copyright (c) National Post

Read more: http://www.ottawacitizen.com/business/fp/Canada+best+business+Forbes/5501273/story.html#ixzz1ZuMgbrCH

BMO Capital Markets pushed its rate hikes forecast back to 2013 on Tuesday, citing continued serious economic risks both home and abroad.

The new forecast pushes the expected time frame for the Bank of Canada to raise its benchmark interest rates back from previous expectations of the second half of 2012.

As recently as this spring, economists had been speculating about a rate hike before the end of 2011, but the market turmoil of the past few months sparked by the eurozone debt crisis has changed all that.

“As global economic risks have escalated, casting commodity prices and the Canadian dollar much weaker, the Bank of Canada’s diminishing tightening bias has probably diminished further,” Michael Gregory, senior economist with BMO Capital Markets, said in a report.

Mr. Gregory noted that the market has now actually swung all the way into cut territory pricing in two 25-basis point rate cuts by April 2012. But with inflation slightly below target, a weak loonie and credit markets still functioning, movement in either direction is unlikely.

“The policy easing bar remains high. Short of signs of imminent recession, the bank should remain on hold,” he said.

Mr. Gregory also forecasts the loonie to tumble further, down to US93¢ before recovering to parity by 2013.

Read more: http://www.ottawacitizen.com/business/fp/rate+hikes+until+2013/5500200/story.html#ixzz1ZuLldhA5

Canada’s lending industry is witnessing rock-bottom interest rates and unrelenting competition.

The former has fuelled borrowing volumes. The latter has been known, on occasion, to encourage looser lending criteria.

Together, the two can be destructive to a banking system and economy.

That’s why OSFI (Canada’s banking regulator) is being proactive. In a speech today, OSFI head Julie Dickson laid it out like this for financial institutions:

• Low rates have likely “increased the incentive for consumers – again – to borrow. Banks also have an incentive to lend, given low margins and the need to compete.”
• As a result: “…We, at the OSFI, have been very focused on home equity lines of credit, and mortgage lending by institutions – both insured and uninsured books.”
• “The message from OSFI to financial institutions is that…institutions should guard against loosening historical underwriting standards – for example, by moving to higher loan-to-value ratios or waiving any due diligence requirements.”
• FIs must protect against imprudent lending “more so than they have historically.”

After her speech, Dickson told reporters:

• “I think the concern is that the conditions are such that there would be tremendous pressure on banks to loosen [lending] standards.”
• As a result, OSFI is “stepping in to increase the monitoring” of lender portfolios.
• “I think it’s prudent to increase [FI] capital levels as soon as we can.” (This was in response to a separate question on the new Basel III capital/liquidity standards.)

Dickson also noted that OSFI is presently cooperating with the international Financial Stability Board to develop global guidelines “for what constitutes safe mortgage lending.” That includes down payment, loan-to-value and income verification parameters.

Despite the warning, Dickson acknowledged that Canadian banks have “managed risk” well to date, adding that Canadian FIs are in “a position of strength”.

ROME— Globe and Mail Update

In Asia, the Nikkei 225 lost 2 per cent and the Shanghai Composite was down 2.8 per cent. Most commodities, gold included, were down significantly. Copper prices, which are often viewed as a proxy for global economic growth, lost 4.6 per cent, taking them to a year low.

The market was gyrating so furiously that it produced some extraordinary spectacles. For instance, Germany’s 5-year credit default swaps, a measure of the cost of insuring sovereign bonds against default, hit a record high even as German bonds, considered Europe’s safest debt, dropped to a record low yield of 1.7 per cent.

In Europe, the banks and mining companies bore the brunt of the selloff. Every bank and miner of any size opening lower on Thursday. French banking giant BNP Paribas lost more than 5 per cent, taking the one-week loss to 24 per cent and the 6-month loss to 56 per cent. Italy’s UniCredit shed 3 per cent, for a six-month loss of 64 per cent.

Investors fear that the European banks lack the capital to absorb the twin threats of a slowing economy and a Greek default. In an interview with France’s Le Figaro, Michel Barnier, the European Union’s financial services commissioner, that he can’t rule out the possibility that some European banks will need bailouts.

Among the mining companies, Xstrata, the Anglo-Swiss diversified miner that owns Canada’s Falconbridge, lost 8 per cent as investors took the view that global growth will get crunched as the debt and banking crises intensify.

In Europe, the factor that seemed to be propelling the markets downward was particularly bleak data from the newest purchasing managers’ index, or PMI. The index, which is widely followed, declined to 49.2 from 50.7 against a consensus of 49.8, leaving it at the lowest level since mid-2009, when the financial crisis was still in full swing. “The current index level indicates that the euro zone recovery has ground to a complete halt,” ING Bank’s Martin van Vliet said.

The manufacturing and services indexes also fell, adding to the doubts about the sustainability of the global recovery that seemed to be in place early this year.

In a note, RBC Dominion Securities said the PMI slowdown may force the European Central Bank to reconsider its current no-easing policy. RBC said that “with a euro area recession now a distinct possibility, that position will come under renewed pressure.”

The European markets were bound to fall Thursday if only because the Fed’s “Operation Twist” damaged market confidence, even though its immediate goal – flattening the yield curve by pushing down long-term interest rates – worked. In announcing the US$400-billion operation, the Fed signalled “significant downside risks” to the American economy. The warning triggered a retreat from growth-focused investments.

The global market selloff is expected to make companies reconsider financing plans. On Thursday, China’s Sany Heavy Industry, a maker of construction machinery, postponed its $3.3-billion (U.S.) offering on the Hong Kong market, citing weak market conditions. Hong Kong’s Hang Seng Index has fallen 22 per cent this year.