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Has Canada Misfired on a Global Banking Opportunity?

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The acuteness of the Great Recession’s sting has dissipated over the past two years; however, the legacy remains.  Western economies, notably the southern states within the European Union and the USA, averted financial disaster by shifting the risk of individual consumer default squarely upon the government’s shoulders.  But now that the world appears to be on the other side of the global tempest the question must be asked: Has Canada misfired on a Global Banking opportunity?  

The Canadian banking system earned its 15 minutes of fame as historic financial institutions around the world sifted through the rubble of failed strategies and miscalculated capital positions.  Canada’s regulatory framework sheltered the country’s biggest lenders from crippling losses, but more importantly, facilitated aggressive growth strategies.  While traditional global competitors were retrenching their positions, Canadian banks levered their newfound reputation for fiscal prudence by leading with their most attractive asset: their balance sheets.

Market analysts postulated Canadian banks, recognizing the world of financial institutions had become a buyers’ market, would embark upon an international shopping spree.  With the exception of the Bank of Montreal (BMO) acquisition of M&I, a mid-sized bank located primarily in the American mid-west, they were wrong.  The myriad of financial assets available for auction included banks, insurance companies, wealth management entities, and investment brokers / dealers.  There was a plethora of supply.  

Unfortunately, monetizing the assets of prospective acquisition targets while accurately measuring the off-balance sheet liabilities that lurked within the notes to the financial statements only proved palatable to firms with a rigorous tolerance for risk.  Not exactly a defining characteristic of the Canadian banking industry.  

Rather than acquire and assimilate global financial firms, Canadian banks stuck to their knitting, choosing to invest in the ambitions of their domestic commercial clients.  You could say the Big 6 followed the smart money; and the smart money was flowing to Canada.  BMO’s support of the greenhouse industry in South-Western Ontario underscores this initiative.

Farmers in the region have enjoyed rapid expansion – over 250 acres in less than 2 years.  Bank of Montreal identified the food industry as an attractive niche and developed market-oriented talent to service the industry’s needs.  BMO lenders authorized credit facilities to greenhouse operators in the wake of departed, over-extended US Banks to underpin capital expenditures and currency hedges.  

Despite many homogenous practices within the greenhouse industry, no firm is alike on the subject of currency risk tolerance.  For example, Foreign Exchange team of BMO Capital Markets presented multi-tiered, value-specific proposals to entrepreneurs with an eye on growth.  They tailored currency strategies to manage over ½ a billion in USD receivables by implementing option-based solutions to compliment risk-mitigating forward contracts and spot strategies.  Option overlay structures are an excellent way to crystallize unrealized gains on deep-in-the-money forward contracts.  

While the appreciation of the Canadian Dollar versus its US counterpart has hurt profit margins in the industry, the Loonie’s strength versus the Euro has facilitated the purchase of greenhouse equipment.  European greenhouse technology is unsurpassed in the industry and in the last 6 months BMO Capital Markets Foreign Exchange has supported the purchase of over €50 million euro.  The increase in greenhouse acreage propels these Canadian firms to the upper echelon of their market and increases their global competitiveness.  The greenhouse industry of South-Western Ontario exemplifies how Canadian banks are using their robust balance sheets to underpin the competitiveness of Canadian companies.  

The Canadian economy remains vibrant despite debt concerns in Europe and the United States.  Meanwhile, inflationary price pressures threatening developing economies in South America and South-East Asia have yet to fully assert themselves north of the 49th parallel.  Canada boasts a stable housing market, a labour market that continues to create jobs, and a Central Bank with the autonomy to raise rates should inflation threaten economic development.  Meanwhile, global investors are flocking to Canadian securities: $15.4 Bn in June 2012; with Federal and Provincial bonds totaling $11.1Bn.  Is there any wonder Canadian banks are choosing to invest their capital in Canadian firms?  

Rather than misfiring on a global opportunity, it appears Canada is firing on all cylinders.

*The Foreign Exchange team at BMO Capital Markets has recently been recognized by Global Banking & Finance Review as the Best Forex Provider, North America 2011 and as the Best FX Bank North America, 2011 by DealMaker’s Monthly Survey. *  

To learn how BMO Capital Markets can help you achieve your ambitions, email us at [email protected], or visit www.bmocm.com/fx for a list of contacts in your area.

Disclaimer: The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Bank of Montreal (“BMO”) and its affiliates make every effort to ensure that the contents thereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither BMO nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which may be contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to BMO and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting BMO or its relevant affiliate directly. BMO and/or its affiliates may make a market or deal as principal in the products (including, without limitation, any commodities, securities or other financial instruments) referenced herein. BMO, its affiliates, and/or their respective shareholders, directors, officers and/or employees may from time to time have long or short positions in any such products (including, without limitation, commodities, securities or other financial instruments). BMO Nesbitt Burns Inc. and/or BMO Capital Markets Corp., subsidiaries of BMO, may act as financial advisor and/or underwriter for certain of the corporations mentioned herein and may receive remuneration for same. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. and Bank of Montreal Ireland p.l.c., and the institutional broker dealer businesses of BMO Capital Markets Corp., BMO Nesbitt Burns Trading Corp. S.A., BMO Nesbitt Burns Securities Limited and BMO Capital Markets GKST Inc. in the U.S., BMO Nesbitt Burns Inc. in Canada, Europe and Asia, BMO Nesbitt Burns Ltée/Ltd. in Canada, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India.
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Dollar extends decline as risk appetite favors equities

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Dollar extends decline as risk appetite favors equities 1

By Stephen Culp

NEW YORK (Reuters) – The dollar lost ground on Friday, extending Thursday’s decline as improved risk appetite attracted buyers to equities and away from the safe-haven greenback.

The U.S. dollar has been weighed down by a string of soft labor market data, even as President Joe Biden’s proposed $1.9 trillion spending package takes shape.

“What the foreign exchange market is looking at in the short term, is the dollar is going to be weak despite progress in the economy because this country has a huge deficit problem,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. “The dollar index could easily test the lows of last September.”

Also weighing on the dollar, the real yield gap between the United States and Germany is at its tightest since March, analysts said, despite the recent rise in U.S. Treasury yields.

Bitcoin continues to hover at record highs, and the world’s largest cryptocurrency was last up 2.6% at $52,931.46, nearing $1 trillion in market capitalization.

Its smaller rival, ethereum, was last down 1.0% at $1,920.13.

The digital currencies have gained about 82% and 1,400%, respectively, year to date, leading some analysts to warn of a speculative bubble.

“There may be a place for (cryptocurrencies) somewhere down the road, but the theories that cryptos will replace paper currency are far-fetched,” Cardillo added. “It’s total speculation at this point and people are going to pay the price.”

The Australian dollar, which is closely linked to commodity prices and the outlook for global growth, was last up 1.15% at $0.7858, touching its highest since March 2018.

The New Zealand dollar also gained, closing in on a more than two-year high, and the Canadian dollar advanced as well.

Sterling rose to an almost three-year high amid Britain’s aggressive vaccination programme. It had last gained 0.34% to $1.40.

The euro showed little reaction to a slowdown in factory activity indicated by purchasing manager index data, rising 0.29% to $1.2126.

The yen, gained ground against the dollar and was last at 105.495, creeping above its 200-day moving average for the first time in three days.

(Reporting by Stephen Culp, additonal reporting by Tommy Wilkes; editing by Emelia Sithole-Matarise)

 

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Bitcoin hits $1 trillion market cap, soars to another record high

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Bitcoin hits $1 trillion market cap, soars to another record high 2

By Gertrude Chavez-Dreyfuss and Tom Wilson

NEW YORK/LONDON (Reuters) – Bitcoin touched a market capitalization of $1 trillion as it hit yet another record high on Friday, countering analyst warnings that it is an “economic side show” and a poor hedge against a fall in stock prices.

The world’s most popular cryptocurrency jumped to an all-time high above $54,000, setting it on course for a weekly jump of more than 11%. It has surged roughly 64% so far this month and was last up 5.5% at $54,405.

Bitcoin’s gains have been fueled by signs it is gaining acceptance among mainstream investors and companies, from Tesla and Mastercard to BNY Mellon.

All digital coins combined have a market cap of around $1.7 trillion.

“If you really believe there’s a store of value in bitcoin, then there’s still a lot of upside,” said John Wu, president of AVA Labs, an open-source platform for creating financial applications using blockchain technology.

“If you look at gold, it has a market cap $9 or $10 trillion. Even if bitcoin gets to half of gold’s market cap, that still growth of 4X, or $200,000. So I don’t know when it stops rising,” he added.

Still, many analysts and investors remain skeptical of the patchily regulated and highly volatile digital asset, which is little used for commerce.

Analysts at JP Morgan said bitcoin’s current prices were well above estimates of fair value. Mainstream adoption increases bitcoin’s correlation with cyclical assets, which rise and fall with economic changes, in turn reducing benefits of diversifying into crypto, the investment bank said in a memo.

“Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits at prices so far above production costs, while correlations with cyclical assets are rising as crypto ownership is mainstreamed,” JP Morgan said.

Bitcoin is an “economic side show,” it added, calling innovation in financial technology and the growth of digital platforms into credit and payments “the real financial transformational story of the COVID-19 era.”

Other investors this week said bitcoin’s volatility presents a hurdle for it to become a widespread means of payment.

On Thursday, Tesla boss Elon Musk – whose tweets have fueled bitcoin’s rally – said owning the digital coin was only a little better than holding cash. He also defended Tesla’s recent purchase of $1.5 billion of bitcoin, which ignited mainstream interest in the digital currency.

Bitcoin proponents argue the cryptocurrency is “digital gold” that can hedge against the risk of inflation sparked by massive central bank and government stimulus packages designed to counter COVID-19.

Yet bitcoin would need to rise to $146,000 in the long-term for its market cap to equal the total private-sector investment in gold via exchange-traded funds or bars and coins, according to JP Morgan.

Rival cryptocurrency ether traded down 0.3%, at $1,934.67, still near a record of $1,951 reached earlier on Friday. It has been lifted by growing institutional interest, after its futures were launched on the Chicago Mercantile Exchange.

(Reporting by Gertrude Chavez-Dreyfuss in New York and Tom Wilson in London; Editing by Dan Grebler)

 

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UK retail sales drop, NatWest loss dampen FTSE 100 mood

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UK retail sales drop, NatWest loss dampen FTSE 100 mood 3

By Shivani Kumaresan and Amal S

(Reuters) – The FTSE 100 was muted on Friday as a bigger-than-expected drop in January retail sales underscored the business damage from a prolonged nationwide lockdown, while NatWest group fell after swinging to an annual loss.

The commodity-heavy FTSE 100 was flat as gains in miners Anglo American, Rio Tinto and BHP Group capped losses.

Oil producers BP and Royal Dutch Shell fell 1.2% and 0.5%, respectively as crude prices slid.

Data on Friday showed British retail sales tumbled much more than expected in January as non-essential shops went back into coronavirus lockdowns. Flash readings of business activity data, due at 0930 GMT, are likely to show the services sector struggling to return to growth in February.

“The 8.2% fall was considerably higher than we’d expected (around 4%), and provides clear evidence the hit to consumer spending is noticeably larger than it was during the November restrictions,” said James Smith, market economist at ING.

He added focus will now be on UK’s COVID-19 vaccination program and easing of restrictions, to drive economic recovery.

The FTSE 100 has recovered nearly 35% from its March 2020 lows but has been largely range-bound since the beginning of this year as a nationwide lockdown hurt business activity, undermining hopes of economic growth in the second half of the year.

The domestically-focused mid-cap FTSE 250 index rose 0.2%, with consumer and industrials stocks leading gains.

NatWest fell 0.6% after the financial services provider swung to a full-year loss for 2020 after COVID-19 lockdowns crunched household spending.

Segro Plc rose 1.7% after the real estate investment trust reported a near 11% jump in annual profit for 2020.

Banking group TBC Bank fell 2.3% after a slump in annual underlying profit due to lower interest rates and limited lending growth in the fourth quarter from the COVID-19 pandemic.

(Reporting by Shivani Kumaresan and Amal S in Bengaluru; Editing by Vinay Dwivedi and Krishna Chandra Eluri)

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