Market Buzz – Credit Markets Continue to Heat Up in Canada as Europe Gets Hit with Credit Downgrades

 On January 13^th, the markets closed out their ninth trading day since the start of the New Year with early optimism giving way to realism. The TSX closed the week at 12,231 points up 42 points, or 0.35%, since the open of market on Monday. Markets throughout North America seemed to follow a similar pattern with both the S&P 500 and Dow Jones Average trading roughly flat for the week after robust gains last week.

Augmenting concerns of a housing bubble in Canada was BMOs announcement, stating that they would be reducing their 5 year fixed rate to 2.99%. This sparked TD to do the same and we suspect the remaining banks will soon follow suit. Canada’s real estate sector has been both a source of strength and concern as the country muddles its way through the current economic environment. The Economist recently published research (economist.com-article) on real estate values from 20 of the world’s most important economies relative to their national incomes and rents. According to the research, Canada’s housing market is 71% overvalued relative to rental income, giving it the unfortunate position of first place amongst the 20 country group. Relative to national income, we fared somewhat better at sixth place with the research indicating that on average, houses are 29% overvalued. I shudder to think of what the data would look like for Vancouver alone.

In Europe, Standard and Poor’s (S&P) cut credit ratings on nine countries, leaving Germany unchanged at triple-A for the time being. Both France and Austria lost their triple-A status with each country taking a one notch downgrade to double-A plus. Italy received a double notch downgrade to triple-B-plus from single-A and Spain was reduced to single-A from double-A-minus. Portugal, Cyprus, Slovakia, Slovenia, and Malta all also received downgrades. The issue with the lower credit rating is that it increases the costs of rolling over debt, placing more of a burden on fiscal and monetary policy at precisely the time that they need to free up capital to reduce their debt load. This is an ever deepening cycle that is the inevitable outcome for chronic debtors whether they are nations, corporations, or individuals. The best advice for the individual is to not let yourself enter into this cycle or to fight your way out if it has already started. After all...countries and corporations may be ‘too big to fail’ but we most certainly or not.