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Market Commentary
CANADIAN EQUITIES
Canadian equities rose on the week as higher materials and energy prices led the advances on the index. Materials producers including Teck Cominco (TCK.B), Goldcorp (G) and Cameco (CCO) led the gains as base metals and gold rallied from speculation of stronger demand. Energy prices also rallied as crude oil gained as investors speculated that stockpiles would decrease from heavy demand for Thanksgiving. Energy producers including Talisman (TLM), Canadian Natural Resources (CNQ) and EnCana (ECA) led the gains in the energy sector as it added 0.6%. The financial sector also rallied on the week as investors anticipated a strong reporting season out of the six big banks in Canada. Shares of Royal Bank (RY) and Bank of Montreal (BMO) led the gains as the financial sector gained 0.3%. Overall, the S&P/TSX Composite Index added 258.20 points or 2.1% to close at 12,631.10.
Rider Resources (RRZ) and Shiningbank Energy Trust (SHN.UN) have announced that the meeting for Rider shareholders to consider the proposed Plan of Arrangement between the two companies has been rescheduled to December 15th to allow Rider shareholders to continue to evaluate the consequences of the proposed changes to the taxation of income trusts.
KCP Income Fund (KCP.UN) – Announces Strategic Review. KCP‘s Board of Trustees has engaged TD Securities Inc. and Genuity Capital Markets to assist the Board with its ongoing process of identifying and considering strategic alternatives available to KCP to enhance unitholder value. The Trustees have decided to accelerate and now formalize the process in response to the October 31 announcement by the Canadian Federal Government of its intention to tax income trusts, and the new challenges facing the income trust sector as a result of that proposed change.
US & INTERNATIONAL EQUITIES
US equities were mixed as low volume over the short trading week combined with little market moving news. The week started well, with the market showing good resilience on Monday after opening lower. During the week, Freeport-McMoran (FCX) made a $26 billion bid for Phelps Dodge (PD), and Equity Office Properties (EOP) announced it would go private for $20 billion. The Nasdaq made a bid for the remaining portion of the London Stock Exchange it did not own, and Bank of America (BAC) offered $3 billion for the US Trust unit of Schwab (SCHW). Concerns that the market was overbought and that a correction might loom produced a lower open despite all the deal action. Tuesday and Wednesday the market posted modest gains in quiet action. Medtronic (MDT), Deere (DE), and Dell (DELL) posted good earnings reports. For the week, the S&P 500 declined 0.25 points or 0.0% to close at 1400.95, the Dow Jones Industrial Average dropped 62.39 points or 0.5% to close at 12280.17, and the Nasdaq added 14.40 points or 0.6% to close at 2460.26.
Oracle (ORCL) has held preliminary talks to buy Intec Telecom Systems. London's Sunday Times said that Oracle President Charles Phillips met with Intec Chief Executive Kevin Adams in London earlier this month and a potential transaction was discussed.
AT&T (T) and Bell South (BLS) shareholders are worried that the FCC will impose concessions for final approval of the merger. Some are speculating that the companies may have to require a prix fixe Internet menu for consumers and content providers or some other costly concession. The flat pricing scheme is known as "'Net neutrality," and its prospect has been a drag on telecom stocks.
FIXED INCOME
The US's most important holiday of the year, Thanksgiving, took place this Thursday, and it caused liquidity in North American bond markets to dry up. US bond markets closed early on Wednesday, were fully closed on Thursday, and closed early on Friday. This left only about half of the usual time for fixed income trading to take place. Due to the holiday, the economic release calendar was essentially empty with only initial jobless claims and Michigan Consumer Confidence coming out on Thursday. November consumer confidence fell to 92.1 from 93.6 in October, but the index still sits near its highest level since mid-2005. The current conditions index fell to 106.0 from the 107.3 reading in October, and the expectations index declined from 84.8 to 83.2 but is still higher than the average reading of 80.4 set over the last three decades. We saw a healthy rally in the Treasury market with yields falling 5-6bps in the 5 to 10-year maturities while the 2-year yield fell 3bps.
Canadian bond market activity was also light last week because of the US holiday. Bonds finished the week slightly higher with yields 2-4bps lower across the curve. The Loonie had hit a 7-month low early in the week but rebounded sharply on Wednesday and Thursday to finish 1% higher week-over-week at 1.1353/US$. This rally in the C$ was more a function of broad US$ weakness than anything fundamental in the Canadian economy.
Similar to the US, Canada's economic release calendar was light though there were two important releases: retail sales and CPI Inflation. Retail sales fell 1.2% in September, which was the largest one-month drop in 2006. Ex-autos, sales fell 0.9% against the expectation of -0.3%. Removing the impact from autos and gasoline sales, retail sales actually rose 1%. The initial bond market reaction to retail sales was a rally, but money started to shift from bonds to equities as the S&P/TSX soared to a record high on Wednesday. Bond prices were close to unchanged on the day. CPI inflation fell for a second month in October, and the headline figure remained below the Bank of Canada’s 1- 3% target range as gasoline and commodity prices continued their descent. Year-over-year, the all-items inflation rate rose to 0.9% from 0.7% in September and the index excluding energy costs is 2% higher than its year-ago levels. The Bank of Canada’s measure of core inflation increased 2.3% y/y touching its highest level since 2003. Economists are now forecasting that the Bank will not ease rates until the third quarter of 2007.
The other highly anticipated event of the week was the Economic and Fiscal Update from Finance Minister Flaherty Thursday afternoon. However, the update provided little in the way of substance so had little impact on the bond or currency market. The Government revised up its forecast period for the debt-to-GDP ratio falling to 25% to 2012-2013 from 2013-2014. Currently, the ratio stands at 35%. The budget surplus forecast for this year and the next five years totaled $18.6BN. In conjunction with the Bank of Canada, the Government announced that the inflation control target would continue to be the 2% midpoint of the 1-3% inflation control target. Monetary policy is not expected to be impacted by this update from the Finance Minister.
This week, the US calendar is full of economic releases and Federal Reserve official speeches. Some of the more notable releases are housing data, core PCE deflator, the Fed's Beige Book, and ISM. In Canada, the main release will be GDP on Thursday.
COMMODITY AND CURRENCY UPDATES
Canadian Dollar – On Friday, the CAD climbed in response to the Fiscal Update released by the Federal Government and a weakening USD. The increase in surplus to C$7.2 billion was a non-event when initially announced but proved to be C$ positive as the CAD increased 0.7% on the day. Also helping the currency are bets that the Federal Reserve will be forced to cut rates in the coming months as the U.S. economy cools. The C$ broke through the 1.1400 level to trade at 1.1332 late in Toronto.
Australian Dollar – The Aussie rose to 18-month highs in early trading on continued speculation that investors will take advantage of the interest rate premium over the U.S. The currency hit an intraday high of 78.17 before finishing the local trading session at 77.87. Currently, 30-day bank bill futures are pricing in a 14% chance of another Australian rate hike by March 07.
Crude oil prices rose early in the week gaining $0.27 to $59.24 per barrel for the January delivery contract and ended the week just below $60 to close at $59.90 per barrel Friday. Prices have traded in the range of $56 - $61 over the past month and are likely to continue trading in this range as unseasonably warm temperatures are forecast over the next week. The front-month contract is trading higher this morning to $60.20 per barrel following news from Saudi Arabia’s oil minister that his country may support further cuts by OPEC.
Natural gas for December delivery fell 5.6% to close at $7.718 per MMBTU during Friday’s trading session on speculation that inventories are likely to support demand through the winter season. Natgas prices are forecast to decline over the week as milder temperatures soften demand.
Gold – In Asia overnight gold hit a high of $642 per ounce before succumbing to profit taking. The key driver for gold remains US dollar weakness, after the Bank of China’s warning late Friday that East Asian central banks are facing risks of both declining US long bond yields and a declining US dollar. This morning in London gold fixed at $637.50 and the markets are quiet, waiting the return of US players after the extended long weekend. While there may be a bit of a pullback on profit-taking today, the market will likely see any price correction as a buying opportunity, and overall we expect gold and gold equities to push higher by year end. Gold Price: USD644.50
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