A week of (semi) surprises, from Saudi kings to central banks

Jan. 23: Oil looks for clues after the death of King Abdullah, the Greek election, and why McDonald's golden arches are losing their glow


It’s safe to say this week has been a central bank bonanza.

Between the World Economic Forum, the surprise rate cut by the Bank of Canada, and the surprisingly large dose of quantitative easing by the European Central Bank, it’s been a busy couple of days – and the excitement will continue into the weekend, with a closely watched election in Greece this Sunday.

Today, we have some inflation and retail sales numbers expected for Canada. In November, inflation fell to two per cent, largely on low oil prices – and given oil’s dive since then, inflation will likely be lower for the last month of 2014. In Europe this morning, we also saw manufacturing PMI (purchasing manager’s index), which measures growth – and it appears the eurozone is keeping its head just above water on that front, rising to 51 last month (50 separates growth from contraction).

Banks haven’t cut their interest rates – yet. Canada’s major banks have yet to announce any cuts to their own prime lending rates after the Bank of Canada’s cut on Wednesday – Bloomberg reported that TD and RBC have both said they’re not yet considering cuts, raising questions about how soon the benefits of a cut will be passed on to borrowers.
However, the Financial Post say the impact of the rate cut could be felt even sooner than expected – with the loonie taking a sharp fall, losing another half a cent on Thursday and the TSX another gain of more than 200 points yesterday.
In other bank news, RBC has acquired a niche Los Angeles-based bank called City National, known for its connections to the rich and the famous, particularly in Hollywood. The deal cost about $5.4 billion.

The Saudi king dies … and oil prices jump. After the official announcement that King Abdullah of Saudi Arabia had died, oil prices jumped two per cent on speculation that the country’s production quota could change. That’s probably unlikely – this morning, the new King Salman said he’s planning to stay the course on Saudi policy. And while oil prices haven’t had any particularly dramatic falls this week, this morning the U.S. benchmark, WTI, is at $46.55 (around 7:30 a.m.), which is more than a dollar lower than yesterday morning.

What did the ECB do yesterday? Mario Draghi managed to surprise yesterday, even amidst long-awaited announcement of quantitative easing, a form of bond-buying stimulus (here’s a refresher on how it all works) that has been used by the U.S. and Japan. What shocked was not the announcement itself but the sheer scale – a 60-billion-euro-a-month (almost $83 billion Canadian) plan to purchase mostly public bonds, extending until September 2016 or whenever inflation hits two per cent. That’s a commitment of at least one trillion euros – almost $1.4 trillion Canadian. The deal also comes with agreements on risk, with the eurozone countries agreeing to shoulder most of the risk to their own balance sheets, and about 20 per cent shared risk. The euro continued to fall to 11-year lows today, as major European indexes surged.

Greece heads to the polls – with the eurozone watching. Voting in the general election will begin on Sunday, after months of speculation on the impact that a victory for anti-austerity party SYRIZA could have on Europe at large – including fears of a Greek exit from the eurozone. Five years after Greece became the posterchild of the eurozone crisis, spurring rounds of austerity cuts and a 245-billion euro (about $343-billion) bailout from the EU, IMF and the ECB, austerity-weary Greeks are still facing national debt levels at 175 per cent of GDP. Syriza wants half of the bailout debt to be cancelled – and Germany isn’t thrilled.

Are the golden arches losing their lustre? McDonald’s will report their earnings today, but the glow of the Big Mac isn’t quite what it used to be. The mega-chain has been facing challenges on several fronts, from the rise of major competitors in the U.S. like Chipotle, to scandals and supply-chain issues over the safety of meat from a Shanghai supplier. The chain has also faced bumps in Russia, after the government closed several restaurants over alleged sanitary issues – or just political retaliation over rocky U.S. relations – and a general decline in the Russian economy.

Need to know:
TSX: 14,763.98 (+2013.56), Thursday
Loonie: 80.62 (-0.45 cents), Thursday
Oil (WTI): $46.55, Friday morning

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