The morning after I reported on yesterday’s stock market carnage, there have been a few developments. The U.S. Federal Reserve surprised some by cutting its key interest rate by 75 basis points. The Bank of Canada cut, too, but while some thought it ought to be aggressive as well and cut by 50 points, it only cut by 25 points.
As I write this in mid-morning, stocks in Canada are up quite nicely — the S&P/TSX Composite Index is up nearly 350 points — while American markets are already recovering. The Dow Jones Industrial Average plunged nearly 450 points at its open but now it’s down by less than a 100 points.
Here’s some excerpts from reacion I’ve received this morning:
- “The Bank (of Canada) signalled that more rate cuts are coming,” says BMO Nesbitt Burns’ senior economist Michael Gregory, who notes that this is Governor David Dodge’s last rate cut announcement. Mark Carney takes over as governor before the next scheduled rate announcement on March 4. “Canadian rates are headed lower. With the fed funds target rate on a fast train to 2% (consistent with past Fed policy responses to recession), the Bank of Canada will likely cut its policy rate to 3%. Indeed, given that economic and financial market conditions will probably continue to deteriorate between now and the next policy announcement on March 4, you can’t rule out an eventual 50 pointer.”
- “We have clearly underestimated the impact that the subprime mortgage market has had on equity valuations and the broad and growing threat that it now poses to financial market disintermediation,” said CIBC Capital Markets Chief Economist Jeff Rubin. “While default rates on subprime mortgages in the US are still unlikely to reach the 50% rate implied by credit default swaps, cumulative default rates may still rise high enough that, coupled with further housing market price declines, they will fuel growing anxiety over the health of the American financial system.
“We see a mid-year low of 11,000 followed by a spirited 2,000 point recovery over the second half of the year as central bank easing and a gradual reduction in subprime mortgage refinancings allows the index to climb back to the 13,000 mark by year-end. With the subprime mortgage issue largely behind markets in 2009, and still strong growth in overseas economies, an energy and resource-based TSX should be in position to rally further in 2009.
As a result of these revised targets for the TSX and interest rates we are moving nine percentage points of weighting from stocks to bonds. While our new index weighting in equities is still vulnerable to shortterm corrections in North American stock markets, it reflects our longer-term optimism about both global energy and resource markets,” Rubin said. - “Today, the Federal Reserve was forced to cut its key federal funds rate by three quarters of a percentage point, to 3.5 percent, to calm global stock markets, as investors adjusted anew to the long-term structural weaknesses in the U.S. economy, particularly in consumer spending and in the housing and mortgage markets,” wrote Christian Weller, a senior fellow at Washington, D.C. think tank Center For American Progress. “What sparked Monday’s stock market sell off, however, was investors’ lack of confidence in President Bush’s grasp of the depth of the problem. His proposed $145 billion economic stimulus package is not targeted enough to get the biggest bang for the buck from the sizeable spending increase he proposed, and it does not include an answer to the threat of sharply lower house prices.”
- “The question for investors is “what next?”, says Andrew Pyle of ScotiaMcLeod. “I believe that this quarter will mark the bottom of the equity correction. The Canadian call is a little tougher, not simply because the BoC is conducting policy by looking in the rearview mirror, but because it will take time for lower rates to work through U.S. demand and finally show up here. With the exception of CDN financials, I still think things are going to be rough on the TSX (especially if oil and commodities continue to erode, which they should if the world is slowing down).”
- “Today’s release points to additional rate cuts ahead by the Bank [of Canada] especially if the US economy remains under downward pressure,” says Dawn Desjardins, senior economist at the Royal Bank. “Our baseline forecast is that the Bank will lower the overnight rate by another 50 basis points over the next couple of meetings with the risk of more aggressive rates cuts if the US situation continues to deteriorate.”