Canada Bubble Seen as IMF Risk With Record Low Rates
Comment of the Day

January 17 2012

Commentary by Eoin Treacy

Canada Bubble Seen as IMF Risk With Record Low Rates

This article by Doug Alexander and Sean B. Pasternak for Bloomberg may be of interest to subscribers. Here is a section
The IMF agrees, saying Canadian authorities may need to take more measures to rein in household debt, which along with high house prices pose a risk to the nation's economy.

“Adverse macroeconomic shocks, such as a faltering global environment and declining commodity prices, could result in significant job losses, tighter lending standards, and declines in house prices, triggering a protracted period of weak private consumption as households reduce their debt,” IMF staff wrote in the annual assessment of the country's economy last month.

The commercial banks say the low rates are a reflection of falling bond yields, and will help consumers pay off debt faster. The 10-year yield touched 1.837 percent on Dec. 16, the lowest level in data compiled by Bloomberg going back to 1989 as Europe's crisis drives demand for Canada's AAA rated bonds. The premium to equivalent-maturity U.S. Treasuries is seven basis points, compared with 32 basis points on Sept. 5, the most in 2011.

“Low rates are absolutely not an invitation for Canadians to overextend themselves,” Farhaneh Haque, director of mortgage advice at Toronto-Dominion, said in an interview from Toronto.

“If you look at the low rates, you could look at them for the interest savings that will help you get debt-free faster.”

Eoin Treacy's view My view - On returning from a holiday to Vancouver last year I remarked how the property section was larger than the main paper and that the mandarin language edition was thick with adverts attempting to attract Chinese buyers. A boom town is always fun. Vancouver with its picturesque setting and world class restaurants certainly fits the bill. Property prices, however, are well beyond the reach of an increasing number of people. It remains to be seen what effect a property slowdown in China will have on markets such as Vancouver where mainland Chinese are often the marginal buyers at the upper end of the market. .

The Canadian financial sector rebounded from the financial crisis better than just about all other OECD countries. The S&P/TSX Financials Index has lost downward momentum in the region of the 2010 lows and has rallied to test the 200-day MA recently. A sustained move back above 1600 would help bolster the medium-term bullish outlook.

Toronto Dominion is a sector leader and found support in the region of C$70 from August. It rallied to break the 10-month progression of lower rally highs this month. A sustained move below C$70 would be required to question medium-term scope for additional upside. National Bank of Canada has a similar pattern.

Royal Bank of Canada broke downwards from a Type-3 top, as taught at The Chart Seminar, in August, found support from October and pushed back up into the overhead range this month. It will need to hold above the C$50 area if the medium-term bullish outlook is to be given the benefit of the doubt.

Bank of Nov Scotia dropped below the 200-day MA in July and has subsequently encountered resistance beneath this trend mean. While its recent firming has been encouraging, the share will need to sustain a move above C$53 to question the medium-term downward bias. Canadian Western Bank has a relatively similar pattern but failed to rally this month and remains in the region of its recent lows.

Bank of Montreal has been ranging with a mild downward bias for two years. A sustained move above C$60 will be required to suggest a return to medium-term demand dominance.

As long as the global economy remains on a growth footing which, in the absence of an oil price spike, is the most likely scenario, Canada is likely to continue to perform at least in line with its commodity producing peers. However, in the event of a more abrupt slowdown, Canada is unlikely to remain unscathed. The loss of commonalty in the banking sector suggests it may not bounce back as quickly as it did in 2009 in the event of a selloff.

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