Category: Market Action

The Fed is forging ahead with tapering:

The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.

And when the Fed speaks, Emerging Markets listen:

India’s central bank got the ball rolling with its surprise decision Tuesday to raise its main interest rate by a quarter of a percentage point to 8 per cent. Though it justified the move in terms of keeping a lid on inflation pressures, protecting the rupee is widely considered to have been a key motive.

Those considerations were clearly behind the decisions in Turkey and South Africa. The Central Bank of Turkey said it was raising its main overnight lending rate to 12 per cent from 7.75 per cent and more than doubling its one-week rate to 10 per cent from 4.5 per cent.
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South Africa’s central bank was clear that the falling rand had a key role in its decision to raise its main interest rate by a half percentage point to 5.50 per cent despite concerns over growth.
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“The history of using interest rates to defend a currency usually ends in tears,” said Neil MacKinnon, global macro strategist at VTB Capital.

MacKinnon pointed to the experience of Europe before the launch of the euro in 1999. Many currencies had been pegged to each other in the so-called Exchange Rate Mechanism and when markets became volatile in the early 1990s, central banks raised their interest rates to support their currencies.

However, that came at a cost, most notably in Britain. The government there left the currency pact after the Bank of England splashed out billions of pounds and raised its main interest rate a massive 5 per cent in one day in a last-ditch — and ultimately futile — effort to defeat the speculators.

The ERM example is not, I think, the best; there you had interest rate policy essentially being set in isolation with little regard for other problems:

Britain entered under conditions of high inflation, huge balance of payments deficits, a growing PSBR [Public Sector Borrowing Requirement, the government’s cash deficit], and political uncertainty.

Still, Black Wednesday remains vivid in my memory as one of the most fun days I’ve ever had in the market. The Canadian yield curve flattened like hell ‘n’ gone and I was trading all day in big size.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets down 15bp and DeemedRetractibles off 3bp. A surprisingly lengthy Performance Highlights table is dominated by losers. Volume was at the high end of average.

PerpetualDiscounts now yield 5.63%, equivalent to 7.32% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.55% (maybe a little bit more?) so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, the same as in the January 22 report.

I always take heart from evidence that governments don’t really control economies:

When Argentina decided last week to ease limits on dollar purchases, it became the latest emerging-market nation to acknowledge that capital controls usually fail in masking an economy’s flaws.

Argentina allowed the peso to plunge 15 percent after the central bank began scaling back interventions in the foreign-exchange market on Jan. 22, spurring price increases of as much as 30 percent on consumer goods as international reserves fell to a seven-year low. The black-market price in Argentina rose last week to a record 12.75 pesos per dollar, compared with the official rate of about 8, according to Buenos Aires newspaper Ambito.
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Restrictions on capital flows, ranging from Argentina’s tax on vacations abroad to Malaysia’s stabilizing the ringgit after the 1997 Asian crisis, have had mixed results in boosting investor confidence in a country’s economy. Capital outflow restrictions can be effective “if they are sufficiently comprehensive to slow a sudden ‘rush to the exit,’” according to a report by four International Monetary Fund researchers released this month.
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In Venezuela, a decade of currency controls is fueling the world’s fastest inflation among the 114 economies tracked by Bloomberg and shortages of basic goods.

The official rate of 6.3 bolivars per dollar compares with the 75-bolivar rate on the black market. Official dollars therefore are the most profitable assets in the country, allowing people who have access to them enjoy a lifestyle far beyond the reach of an average Venezuelan.

The referenced paper by Christian Saborowski, Sarah Sanya, Hans Weisfeld and Juan Yepez has the abstract:

This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.

Turkey’s done a lot of catching up!

Turkey’s central bank more than doubled its main interest rate at an emergency meeting, reversing years of policy after the lira slid to a record low.

The bank in Ankara raised the benchmark repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent.
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While most investors advocate higher rates to bolster the lira, Prime Minister Recep Tayyip Erdogan has repeatedly railed against an “interest-rate lobby,” blaming it for a series of blows to his government, including last year’s wave of protests and the graft probe implicating his ministers.

Ignoring reality only makes it hit harder. But politicians never learn.

Sheila Bair has achieved the regulatory end-game:

Sheila Bair, the Federal Deposit Insurance Corp.’s chairman from 2006 to 2011, has been hired for a new gig as a board member at the Spanish lender Banco Santander SA. This seems to have gotten some people upset, even riled.
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The general rule in banking is that it’s OK to become a regulator, put in a few years playing nice with the industry, then take a cushy board seat. Bair didn’t follow that path exactly. Now and then she made some remarks criticizing the way huge banks were run. But she never said anything so piercing or harsh that it distracted them from blowing up the financial system while she was FDIC chairman. She didn’t interfere with anybody’s bailout checks. She kept the FDIC’s bank-financed insurance fund woefully undercapitalized for years. It’s hard to see why “many in the banking world” are upset with her.

It was an unevenly good day for the Canadian preferred share market, with PerpetualDiscounts up 28bp, FixedResets flat and DeemedRetractibles gaining 9bp. Volatility was minimal. Volume was above average.

This is interesting … the demand for physical gold is (currently) uncorrelated with demand for gold certificates:

Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.

Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group Inc. predicts bullion will “grind lower” over 2014.

“The long-term physical buyers see these price drops as opportunities to accumulate more assets,” said Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer. “We have witnessed some top selling days in the past few weeks.”

Gold ETFs have always struck me as being something of an internal contradiction. If the world dissolves in hyperinflation followed by chaos, do you really want to own an electronic record that gives you ownership of part of a company that holds title to some gold three thousand miles away? Although mind you, if I did want to stockpile something as chaos insurance, I’d prefer something of more practical value … books, spices, a smithy, ammunition.

We have another entry for the ‘Unintended Consequences’ competition:

Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.

It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.

The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.

The 2004 law has “clearly been a failure” in halting the tax exodus, said Edward Kleinbard, a professor at University of Southern California’s Gould School of Law. “And it now has the perverse result of putting money into executives’ pockets sooner.”

The law imposes a special tax of 15 percent on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S. Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.

The consequences of the regulators’ assault on public markets is also becoming more clear:

Facebook Inc. (FB)’s 2012 stock market debut helped spark a boom in U.S. initial public offerings, sucking the life out of a Wall Street fad that the social network had helped popularize: private share exchanges.
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[NASDAQ honcho Robert] Greifeld’s proposed Nasdaq Private Market would help companies large and small let employees trade while avoiding the disclosure requirements and compliance standards that publicly traded firms face. A barrier was reduced in 2012 with the Jumpstart Our Business Startups Act, which quadrupled to 2,000 the number of shareholders a company could have before it needed to disclose financials.
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To succeed, Nasdaq Private Market must persuade more companies to forgo the rewards of being public, such as the lure of greater riches and the brand recognition that comes with a ticker symbol. And only accredited investors — such as large institutions and wealthy individuals — will be eligible to buy stakes, limiting the pool of potential shareholders.

And, in the latest inflation chatter:

One of Janet Yellen’s first challenges as Federal Reserve chairman is generating enough inflation to meet the central bank’s target of 2 percent.

Policy makers have failed to attain their goal for almost two years and now are paring the pace of their bond buying. Inflation rose at a 0.9 percent rate for the 12 months ending in November, according to the central bank’s preferred measure. The last time prices were climbing at or above 2 percent was in April 2012.
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Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a Jan. 7 speech that too-low inflation can be “a cause for real concern” because it increases the possibility a “negative shock” to the economy may lead to deflation. That could cause households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up. Too-low inflation also means higher inflation-adjusted interest rates, making it harder to achieve a sufficient pace of growth.

“Furthermore, persistently low inflation can theoretically undermine the credibility of the central bank,” said Rosengren, who dissented against the December decision to cut monthly bond buying by $10 billion. If the Fed announces a goal “but is unable to achieve that target in a reasonable time frame, some may call into question its ability to do so in the medium- or long-term as well.”

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets flat and DeemedRetractibles up 8bp. Volatility was more than might be expected given these figures, but with no clear pattern. Volume was low; but such as there was was dominated by the RY FixedResets with the February Exchange Date.

Beware! Galloping inflation!

Consumer prices rose 1.2 per cent in December on an annual basis, a faster pace than November’s 0.9 per cent, Statistics Canada said Friday.

The rise in the pace of inflation was primarily driven by higher prices for gasoline, which surged 4.7 per cent. When you strip out the impact of that, consumer prices rose 1.1 per cent annually, though also faster than November’s 1 per cent, the federal agency said.

So-called core prices, which exclude volatile items and help guide the Bank of Canada, increased by 1.3 per cent, again at a greater pace than the 1.1 per cent in November.
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“Over all, the inflation picture remains very mild in Canada as evidenced by the three-month annualized core rate of just 0.7 per cent,” said senior economist Krishen Rangasamy of National Bank Financial.

“For 2013 as a whole, the annual inflation rate was 0.9 per cent, the lowest since the 2009 recession, and the second lowest since 1994,” he added.

BAM sold some twelve-year notes:

Brookfield Asset Management Inc. (NYSE: BAM) (TSX: BAM.A) (Euronext: BAMA) announced today that it has agreed to issue C$500 million aggregate principal amount of medium term notes (“notes”) with a January 2026 maturity and a yield of 4.825%.

The notes have been assigned a credit rating of Baa2 (stable) by Moody’s, A- (stable) by Standard & Poor’s, BBB (stable) by Fitch and A (low) (negative) by DBRS.

The company intends to use the net proceeds of the issue for general corporate purposes.

The notes are being offered through a syndicate of agents led by CIBC World Markets Inc., Credit Suisse Securities (Canada), Inc., HSBC Securities (Canada) Inc. and RBC Dominion Securities Inc.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 30bp, FixedResets off 16bp and DeemedRetractibles gaining 8bp. The Performance Highlights table is comprised of losing FixedResets and winning PerpetualDiscounts. Volume was average.

Taper? Schmaper!:

Treasuries rose the most in almost two weeks, pushing the 10-year note yield further below the level when the Federal Reserve voted last month to taper its bond purchases, as economic reports showed an uneven economic expansion.

The benchmark yield reached a seven-week low as an emerging-market currencies selloff amid slowing economic growth and rising social tension stoked demand for safety. Continuing jobless claims rose last week more than forecast, a manufacturing gauge unexpectedly fell this month, pushing yield further below where it stood after the central bank announced Dec. 18 it would reduce its bond purchases to $75 billion per month from $85 billion amid signs of improved economic growth.

Much handwringing over the loony:

The Canadian dollar weakened to the lowest in 4 1/2 years against its U.S. counterpart after Poloz left the main interest rate unchanged yesterday and said the strength of the currency is hurting exporters. Hedge funds and other large speculators have already amassed near-record bets this year for the local dollar to decline as Canada’s trade deficit came in nine times wider than forecast and a report showed the country shed jobs in December.

The drop pushed the currency below the median forecast of C$1.10 per U.S. dollar for the end of the year in a Bloomberg survey of 63 contributors, suggesting strategists will be revising estimates lower. While some investors speculated that the central bank would signal a bias toward easing policy, Poloz said his next rate move depends on how economic data change the balance of risks to the world’s 11th-largest economy.
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Canada’s dollar, often called the loonie for the aquatic bird on the C$1 coin, fell as much as 0.8 percent today to C$1.1174, the lowest level since July 2009, and was at C$1.1117 as of 8:48 a.m. in Toronto. That added to its 1.1 percent slide yesterday. Fair value is around C$1.15, according to [Deutsche Bank global head of Group of 10 foreign exchange Alan] Ruskin.

The loonie is the worst performer during the past one and six months against a basket of nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, with declines of 4.9 percent and 8.3 percent. Even so, the Canadian currency is still about 11 percent overvalued compared with its U.S. peer, according the Organisation for Economic Cooperation and Development’s purchasing-power data.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 28bp, FixedResets gaining 14bp and DeemedRetractibles up 26bp. An average-sized Performance Highlights table has a preponderance of winning PerpetualDiscounts. Volume was high.

Here’s a headline we haven’t seen in a while: inflation in Japan:

The Bank of Japan refrained from boosting unprecedented easing as accelerating inflation marks progress in its bid to stamp out 15 years of falling prices in Asia’s second-biggest economy.

Governor Haruhiko Kuroda’s board stuck to its pledge to expand the monetary base by an annual 60 trillion to 70 trillion yen ($671 billion) today after a two-day meeting in Tokyo, in line with the forecasts of all 36 economists surveyed by Bloomberg News. The BOJ maintained its projection that core consumer prices will rise 1.9 percent in the year starting April 2015, excluding the effect of sales-tax increases, and scrapped a reference to the economy facing “uncertainty.”
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Consumer prices excluding fresh food rose 1.2 percent in November from a year earlier, the fastest pace since 2008 and approaching the 2 percent target set a year ago. For the final quarter of 2013, analysts estimate inflation was 1.1 percent, according to a separate poll, nearly three times economists’ 0.4 percent forecast in a survey in April last year.

There’s also an indication of good news from the UK:

The UK’s unemployment rate has surprisingly fallen to 7.1% in the three months to November, according to official figures.

The Office for National Statistics revealed the country’s jobless rate fell by 0.3% from the previous three month and was down 0.5% from June to August 2013.

The figures mean the country’s unemployment rate is just 0.1% off the Bank of England’s 7% threshold for considering interest rate rises.

However, the usual suspect when it comes to bad economic news has not failed us:

The earth movers digging out a sandy pit in the beach town of Biarritz could be any construction site in France. Except the builder of the 300 homes and its workers are Spanish.

In the neighboring town of Anglet, a Spanish company built the concert hall inaugurated this month. A kilometer up the road, in Bayonne, a Spanish company is building a 15-lodging apartment block.

And that’s just in a small corner of southwestern France.

The losing French bidders are crying foul, saying the Spanish pay lower wages and cut corners on regulations. The Spanish, fleeing a construction slump and an unemployment rate of 26 percent at home, say they’re just using European Union rules allowing free movement of businesses and workers. The French builders’ inability to stop their Spanish counterparts from wresting business away highlights President Francois Hollande’s uphill battle to make France more competitive.

Meanwhile the the Bank of Canada has been instructed to say:

it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation in Canada has moved further below the 2 per cent target, owing largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period. The Bank expects inflation to return to the 2 per cent target in about two years, as the effects of retail competition dissipate and excess capacity is absorbed.

Global growth is expected to strengthen over the next two years, rising from 2.9 per cent in 2013 to 3.4 per cent in 2014 and 3.7 per cent in 2015. The United States will lead this acceleration, aided by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets. Growth in other regions is evolving largely as projected in the Bank’s October Monetary Policy Report (MPR). Global trade growth plunged after 2011, but is poised to recover as global demand strengthens.

In Canada, growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment. Stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment. Meanwhile, recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in both 2014 and 2015. This implies that the economy will return gradually to capacity over the next two years.

Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed. Weighing these considerations, the Bank judges that the balance of risks remains within the zone articulated in October, and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks.

All this had the same effect as a rate cut, with the loonie dropping:

The dollar plunged to the lowest in more than four years today and returns on Canada’s benchmark stock index were less than half of U.S. equities last year, underscoring an economy beset by the slowest rebound in exports since World War II. Consumers are tapped out with record household debt and governments are more focused on erasing budget deficits than providing stimulus.
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The dollar fell as much as 1 percent after Bank of Canada Governor Stephen Poloz said the direction of his next move will depend on the evolution of the economy, and a weaker currency should help the nation’s exporters.

Meanwhile, there was some good news for Air Canada:

Air Canada’s domestic pension plans have swung to a small surplus from a solvency deficit of $3.7-billion a year ago.

The airline said on Wednesday preliminary estimates indicate that its pension plans will be in a “small surplus position” at Jan. 1, 2014.

Elimination of the deficit came about as a result of several factors, including a 13.8 per cent return on investments last year; amended pension benefits that are estimated to have trimmed the deficit by about $970-million; contributions by Air Canada for the year of $225-million; and the application of an estimated prescribed discount rate of 3.9 per cent to calculate future obligations.

Air Canada booked a return of 11.8 per cent over the past four years, placing it in the first quartile for performance compared with large Canadian pension plans.

Finally comes the defence in the US vs. S&P lawsuit that we were all waiting for:

Government officials made no secret of their displeasure when Standard & Poor’s downgraded the debt of the United States in 2011.

But, according to Standard & Poor’s, that indignation led to more than harsh words. It also motivated the government’s lawsuit last year that accused S.& P. of fraud, the ratings agency claims.
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In a telephone call in August 2011, days after the downgrade was announced, an angry Mr. Geithner told Mr. McGraw that S.&P. had made an error in its assessment and that “you are accountable for that,” according to an affidavit by Mr. McGraw that was filed on Monday in United States District Court for the Central District of California.

“You have done an enormous disservice to yourselves and to your country,” Mr. Geithner said, according to Mr. McGraw. The conduct of S.&P. would be “looked at very carefully.”

A disservice to themselves … a disservice to the country … it’s a good thing that he didn’t mention “investors” or one might think he understood the role of Credit Rating Agencies.

There is speculation that yesterday’s RY new issue could open the floodgates:

Canadian banks are likely to sell more than $20-billion worth of new shares, now that investors have showed they can stomach a new style of securities.

This week Royal Bank of Canada became the first domestic lender to test investor appetite for a special type of preferred share that converts into common equity during a catastrophic crisis. The deal, originally for $200-million, sold out quickly, and was ultimately up-sized to $500-million, prompting rating agency Moody’s Investor Service to estimate that more than $20-billion worth of these shares will eventually hit the market.
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“We’ve all been waiting for the first bank to go ahead and do something,” Moody’s credit officer Dave Beattie said in an interview. Now that RBC has set a precedent, and a wildly popular one at that, “I would expect other people to follow the format pretty closely.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 42bp, FixedResets off 2bp and DeemedRetractibles gaining 11bp. BAM PerpetualDiscounts dominated the winning side of the Performance Highlights table. Volume was well above average.

PerpetualDiscounts now yield 5.67%, equivalent to 7.37% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread is now about 275bp, a significant widening from the 265bp reported January 15.

Kevin Carmichael and Tara Perkins of the Globe are speculating about the next Superintendent of Financial Institutions:

Mark Zelmer, a former chief of the Bank of Canada’s financial stability department, represents OSFI at the Basel Committee on Banking Supervision, the global club of financial regulators that sets world banking standards, and has been taking on an increasingly public role in recent months.

The other deputy is Andrew Kriegler, who joined OSFI in February, 2013, after more than two decades on Bay Street, most recently as treasurer at Canadian Imperial Bank of Commerce.

Another possibility is Robert Kelly, chairman of Canada Mortgage and Housing Corp. and the former chief executive of Wall Street bank BNY Mellon, although he would presumably have to step down from his relatively new post at CMHC because OSFI regulates it.

The choice has added significance because Ottawa’s ranks of financial experts – a strength that helped Canada weather the financial crisis – are thinning quickly.

My guess? The one with least back-bone. As a second choice, the youngest one, who will have the most time to cash in on those lucrative financial sector directorships that ex-Superintendents get appointed to, for some odd reason.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 11bp and DeemedRetractibles gaining 14bp. The lengthy Performance Highlights table is dominated by losing FixedResets with low Issue Reset Spreads. Volume was high.

Who wants to buy some European bank shares? There might be some on sale soon!

European banks have a capital shortfall of as much as 767 billion euros ($1 trillion) before the European Central Bank’s probe into the financial health of the region’s lenders, according to a study.

French banks show the biggest gap of 285 billion euros, followed by German lenders with as much as 199 billion euros, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study dated Jan. 15. The figures assume a benchmark capital ratio for other book measures of leverage of 7 percent, they wrote.
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The authors see particularly high risks among German state-owned banks, or Landesbanken. “Germany has many government-owned institutions that may require capital issuances and/or bail-ins,” they wrote.

Spanish banks have a shortfall of 92 billion euros, while Italian banks lack 45 billion euros, the study showed.

Watch out for those rising interest rates:

Royal Bank of Canada, the country’s largest mortgage lender, has quietly cut some of its mortgage rates this weekend. The move appears to be part of a broader dip in rates, although economists generally still expect an increase in 2014.

Five-year fixed mortgage rates rose industry-wide for much of 2013, from their low of 2.64 per cent in April to their high of 3.39 per cent in September, according to Alyssa Richard, the chief executive officer of RateHub.ca. They edged down a bit later in the fall but had generally been steady at around 3.25 per cent since then.

RBC is now cutting its two-, three-, four– and five-year fixed mortgage rates each by 10 basis points. In an emailed statement, the bank said that some mortgage lenders have recently been pricing at lower rates, prompting it to move.

Royal Bank is often a price leader when it comes to mortgages, and other big banks frequently follow suit after it changes its prices. Its five-year fixed mortgage rate is now 3.69 per cent.

The numbers in that story don’t exactly add up all that well, and the Bank of Canada insists that a five year mortgage now runs at 5.14%. Whatever. The reason for the discrepancy, according to ratehub.ca, is:

While the Bank of Canada has the most comprehensive data set, with the high prevelance of mortgage rate discounting, it is not the most accurate. The Canadian Association of Accredited Mortgage Professionals estimates that the average discount applied to a 5 year mortgage rate in 2010 was 1.42%. To source the discounted rates, we have combined our proprietary data supplemented with discount brokerage data from 2006-2010.

They have a picture:

Click for Big

Banks do this ridiculous posted-rate / discounted-rate thing because when you close out a mortgage early, you have to buy it back according to its posted rate, which is much more expensive than buying it back at the discounted rate. The US system, where the standard is a thirty year term with the mortgagee able to pay off at any time at par, is much better for home-owners – but of course, in the US there’s competition.

It was a mildly positive day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets winning 11bp and DeemedRetractibles gaining 6bp. Floaters fared poorly. The Performance Highlights table is notable for it’s heavy concentration of BAM issues … will you, won’t you, will you, won’t you, will you join the dance? Volume was above average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 38bp, FixedResets gaining 11bp and DeemedRetractibles off 7bp. The BAM Floaters got hammered. TRP issues were prominent in the Performance Highlights table, perhaps adjusting themselves for the new issue that settles Monday. However, as the chart below shows, the four TRP issues are well-behaved in terms of Implied Volatility theory. Volume was very heavy.

Click for Big

Protecting investors is boring! It’s time for a brave new world of social engineering!

The Ontario Securities Commission has proposed a new rule that would require companies to report annually on their policies to add more women to their boards and executive ranks.

The new rules unveiled Thursday will also require companies to report on their term limits for directors, which would bring Canada in line with many other countries that have also required companies to disclose whether they have term limits for their boards. Proponents argue term limits help ensure there is more board turnover so new directors – including women – can be added to the mix.

Companies are also being asked to report on whether they have voluntarily adopted targets for women on their boards or in executive roles.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets gaining 9bp and DeemedRetractibles down 21bp. Volatility was minimal. Volume was high.