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Why mortgage stress test changes should not be made in political backrooms

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The main job of the Office of the Superintendent of Financial Institutions (OSFI) is to keep banks out of trouble, and the mortgage stress test ensured none of them were adding riskier creditors to their massive home-loan portfolios. But at the end of January, out of nowhere, the federal banking regulator appeared to go wobbly on the test.

Why? Rita Trichur, one of the better chroniclers of Bay Street, offered a plausible answer. “If you’re wondering why OSFI is suddenly considering fiddling with the stress test as froth builds in the Vancouver and Toronto housing markets, household debt remains high and consumer insolvencies are rising, look no further than Prime Minister Justin Trudeau and his waning political fortunes,” she said in the Globe and Mail on Feb. 13.

You can decide for yourself whether the current group loosened housing regulations for the right reasons, or whether there were more nefarious forces at work

The previous prime minister, Stephen Harper, balked at making it harder to qualify for mortgages, which is one of the reasons household debt is now such a serious problem. Trudeau, via Finance Minister Bill Morneau, introduced the stress test. The real-estate lobby howled, but Morneau held firm and the policy worked: credit growth slowed to a sustainable pace.

Nevertheless, the housing industry, aided by the narrative that life in big cities had become unaffordable, kept up the pressure. The Conservatives promised to adjust the stress test during last fall’s election campaign. The Liberals waited until after they were reduced to a minority government. Morneau’s marching orders from Trudeau included a direction to “review and consider recommendations from financial agencies related to making the borrower stress test more dynamic.”

The re-appointed finance minister got the hint. On Feb. 18, Morneau stepped in front a podium on his way into the House of Commons for Question Period and announced he had made a tweak. “We’ve taken a look at how Canadians can continue to be protected in their investments, in their homes, but at the same time make sure the stress tests are more dynamic to market conditions,” he said at an impromptu press conference that lasted about five minutes.

Starting in April, if you want an insured mortgage, you will have to show you could handle payments at a rate that is two-percentage-points higher than a five-year rate based on recent mortgage insurance applications. OSFI, which sets the rules for uninsured home loans, indicated it would follow the government’s lead. The new calculation will allow riskier borrowers to qualify for bigger loans, and, on the margin, puts upward pressure on prices.

Mortgage Professionals Canada acknowledged the news by tweeting that Morneau and OSFI had “finally” listened. The Canadian Real Estate Association also expressed contentment, saying in a statement that it had been advocating for “changes to the stress test on behalf of potential homeowners who have been sidelined, borrowers who have moved away from the regulated market to the less-regulated options, and real estate markets across the country in need of relief.”

Frankly, there aren’t many markets “in need of relief,” and those that do — Alberta, Saskatchewan and Newfoundland and Labrador — have bigger problems than the stress test. According to CREA’s own assessment, sales of existing homes in January amounted to one of the “stronger readings of the last few years,” and transactions passed year-earlier levels in about two-thirds of all markets, including “most” of the biggest ones.

Kyle Dahms and Matthieu Arseneau, economists at National Bank, estimate that the current stress test, which is based on the posted five-year conventional mortgages posted by the six biggest lenders, constricts an insured homebuyer’s purchasing power by about 22 per cent. The new rules will allow borrowers to increase the size of their loans by about four per cent, based on the latest data, adding “further fuel to a vigorous housing market which is already supported by the recent decline in mortgage rates and a vibrant labour market,” Dahms and Arseneausaid in a research note.

Morneau and OSFI are planning “pro-cyclical” policy, when “counter-cyclical” measures are still needed to offset the stimulative effect of unusually low interest rates. Financial regulation has been elevated in importance since the financial crisis, but officials appear to see it as flexible, unlike managing inflation, which is often described as sacrosanct. “Anyone who has been doing financial regulation long enough knows that as you see these things in play, you realize there are tweaks that could be made,” Carolyn Wilkins, the Bank of Canada’s senior deputy governor, said at a press conference on Jan. 22, when the changes still were under discussion.

The technocratic justification for adjusting the stress test is that it was proving to be somewhat harsher in practice than intended, so an update was in order. A proper financial regulator, responsible to Parliament or that operated at arm’s length from cabinet, might see things differently. Surely it would have preferred to hold the line, judging that the threat of big-city markets such as Toronto and Montreal overheating outweighed whatever minor pain homebuyers and the real-estate industry were feeling.

We can’t know because no such regulator exists in Canada. Those decisions are made deep inside the Finance Department, far from public view. Marie-France Faucher, a spokesperson at the department, said Morneau received advice from the Senior Advisory Committee, a secretive group of senior technocrats that is chaired by the deputy minister of finance and includes representatives from the Bank of Canada, OSFI, Canada Deposit Insurance Corp. and the Financial Consumer Agency of Canada. Canada Mortgage and Housing Corp. was also consulted, she said.

“Strong collegial culture and inter-agency cooperation” is one reason, the International Monetary Fund observed last month, that Canada’s approach to financial oversight “appears to be adequately effective.”

Still, the fund said “first-best” would be to have a single body keeping watch over the financial system, and “second-best” would be elevating the Bank of Canada’s rank within the hierarchy. The reason is transparency and accountability. The fix could be as simple as pulling the Senior Advisory Committee out of the backrooms and replacing the current chair with someone from the central bank.

Until something like that happens, the rules the federal government implements to protect against financial crises will be as credible as the men and women in power at any given moment. You can decide for yourself whether the current group loosened housing regulations for the right reasons, or whether there were more nefarious forces at work.

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Stock market news live updates: Stocks jump after Pfizer, BioNTech fuel Covid-19 vaccine hopes – Yahoo Canada Finance

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Stocks extended gains Monday morning after two pharmaceutical companies received “fast track” designation for the development of their vaccine candidates against Covid-19, stoking hopes of near-term inoculation amid the pandemic.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Pfizer (PFE) and BioNTech SE (BNTX) announced that two of the companies’ four investigational vaccine candidates received the designation from the US Food and Drug Administration, which is intended to speed up both the development and review of new drugs and vaccines. Shares of both companies rose in pre-market trading.” data-reactid=”17″>Pfizer (PFE) and BioNTech SE (BNTX) announced that two of the companies’ four investigational vaccine candidates received the designation from the US Food and Drug Administration, which is intended to speed up both the development and review of new drugs and vaccines. Shares of both companies rose in pre-market trading.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Over the weekend, some states again reported surging numbers of new coronavirus cases, as parts of the country struggled to keep new infections at bay. Florida reported a record 15,300 new Covid-19 cases as of Sunday, the highest one-day total for any US state so far during the pandemic, while new deaths in Florida fell by more than half versus the prior day to 45.” data-reactid=”18″>Over the weekend, some states again reported surging numbers of new coronavirus cases, as parts of the country struggled to keep new infections at bay. Florida reported a record 15,300 new Covid-19 cases as of Sunday, the highest one-day total for any US state so far during the pandemic, while new deaths in Florida fell by more than half versus the prior day to 45.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Despite the ongoing surge in the state, Disney’s (DIS) Walt Disney World Resort began reopening in Florida on Saturday to join competitors including Comcast’s (CMCSA) Universal Studios and SeaWorld Entertainment in opening their park gates to customers in the state.” data-reactid=”19″>Despite the ongoing surge in the state, Disney’s (DIS) Walt Disney World Resort began reopening in Florida on Saturday to join competitors including Comcast’s (CMCSA) Universal Studios and SeaWorld Entertainment in opening their park gates to customers in the state.

Elsewhere, new deaths in Arizona increased for a third straight day, with 86 reported as of Sunday. The state’s new case count of 2,537 marked a step down from the 3,038 from the day prior. California’s 8,460 new cases were below the state’s average one-day increase over the past seven days.

“The economic implications of the second wave are pretty clear, qualitatively at least. The third quarter recovery will be slower than we previous expected, but we’re hoping that some of the deferred spending will be pushed into the fourth quarter rather than abandoned altogether,” Ian Shepherdson, chief economist for Pantheon Macroeconomics, wrote in a note.

“Markets are caught in the middle. We have argued for months that a full recovery depends on three pillars, namely, sustained progress against the virus, the continuance of super-accommodative Fed policy, and consistent support from fiscal policy,” he added. “Clearly, the first pillar has crumbled, and the third is now in limbo, with the Senate in recess until July 20. The Fed can’t do everything, so we’re not surprised that the S&P 500 has been range-bound since late May.”

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="As for other potential market catalysts, second-quarter earnings season kicks off this week with a packed docket of big bank earnings, along with other early reporters including Netflix (NFLX), UnitedHealth Group (UNH) and Delta Airlines (DAL). Financials, which have lagged for the year to date, outperformed on Friday heading into earnings season, with the KBW Bank Index (KBW) rising by the most in five weeks at the end of last week.” data-reactid=”25″>As for other potential market catalysts, second-quarter earnings season kicks off this week with a packed docket of big bank earnings, along with other early reporters including Netflix (NFLX), UnitedHealth Group (UNH) and Delta Airlines (DAL). Financials, which have lagged for the year to date, outperformed on Friday heading into earnings season, with the KBW Bank Index (KBW) rising by the most in five weeks at the end of last week.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Market participants have so far set a low bar for second-quarter earnings results across sectors, with the coronavirus pandemic and measures taken to contain it at their most widespread in the April through June period this year. The estimated earnings decline for the S&amp;P 500 is 43.8% for the second quarter,&nbsp;according to data from FactSet as of early July.&nbsp;Such a result would represent the largest year-over-year decline in earnings since the fourth quarter of 2008, and a steep downward revision from the estimate as of March 31, which had been for a decline of 13.6%.” data-reactid=”26″>Market participants have so far set a low bar for second-quarter earnings results across sectors, with the coronavirus pandemic and measures taken to contain it at their most widespread in the April through June period this year. The estimated earnings decline for the S&P 500 is 43.8% for the second quarter, according to data from FactSet as of early July. Such a result would represent the largest year-over-year decline in earnings since the fourth quarter of 2008, and a steep downward revision from the estimate as of March 31, which had been for a decline of 13.6%.

9:31 a.m. ET: Stocks open higher

Here were the main moves in markets, as of 9:31 a.m. ET:

  • S&P 500 (^GSPC): +26.76 points (+0.84%) to 3,211.8

  • Dow (^DJI): +249.99 points (+0.96%) to 26,325.29

  • Nasdaq (^IXIC): +115.28 points (+1.1%) to 10,731.46

  • Crude (CL=F): -$0.32 (-0.79%) to $40.23 a barrel

  • Gold (GC=F): +$15.20 (+0.84%) to $1,817.10 per ounce

  • 10-year Treasury (^TNX): +2.5 bps to yield 0.658%

9:11 a.m. ET: PepsiCo shares rise after consumer pantry loading drives Q2 earnings beat

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Food and beverage giant PepsiCo (PEP) reported fiscal second-quarter results that topped consensus estimates, driven by a jump in sales at the company’s North American food and snacking businesses.” data-reactid=”39″>Food and beverage giant PepsiCo (PEP) reported fiscal second-quarter results that topped consensus estimates, driven by a jump in sales at the company’s North American food and snacking businesses.

Core earnings per share of  $1.32 per share was better than the $1.25 expected, and net revenue of $15.95 billion also topped estimates for $15.39 billion. Organic sales PepsiCo’s Quaker Foods North America unit surged 23% over last year, or more than three times greater than expected, and Frito-Lay North America also outperformed. However, PepsiCo’s North American beverage unit – its largest by sales – saw organic revenue drop 7% during the quarter.

“Our snacks and food business has performed very well, while our beverage business was challenged but continued to improve its competitive positioning,” PepsiCo CEO Ramon Laguarta said in prepared remarks of 2Q results. We expect our snacks and foods businesses to remain resilient, albeit with some moderation in growth, while our beverages business should deliver better performance during the second half of this year.”

7:26 a.m. ET Monday: Futures extend gains after vaccine hopes rise further

Here were the main moves in markets, as of 7:27 a.m. ET:

  • S&P 500 futures (ES=F): 3,201.75, up 23.25 points or 0.73%

  • Dow futures (YM=F): 26,191.00, up 214 points, or 0.82%

  • Nasdaq futures (NQ=F): 10,931.25, up 94 points, or 0.87%

  • Crude (CL=F): -$0.76 (-1.87%) to $39.72 a barrel

  • Gold (GC=F): +$12.90 (+0.72%) to $1,814.80 per ounce

  • 10-year Treasury (^TNX): +1.3 bps to yield 0.646%

6:02 p.m. ET Sunday: Stock futures add to Friday’s gains

Here were the main moves at the start of the overnight session for U.S. equity futures, as of 6:02 p.m. ET:

  • S&P 500 futures (ES=F): 3,189.75, up 11.25 points or 0.35%

  • Dow futures (YM=F): 26,081.00, up 104 points, or 0.4%

  • Nasdaq futures (NQ=F): 10,857.25, up 20 points, or 0.18%

Guests wearing masks walk to the entrance of Walt Disney World's Magic Kingdom in Orlando, Florida, on Saturday, July 11, 2020. The theme park reopened at limited capacity during the Coronavirus pandemic. (Stephen M. Dowell/Orlando Sentinel/Tribune News Service via Getty Images)
Guests wearing masks walk to the entrance of Walt Disney World’s Magic Kingdom in Orlando, Florida, on Saturday, July 11, 2020. The theme park reopened at limited capacity during the Coronavirus pandemic. (Stephen M. Dowell/Orlando Sentinel/Tribune News Service via Getty Images)

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Follow Yahoo Finance on&nbsp;Twitter,&nbsp;Facebook,&nbsp;Instagram,&nbsp;Flipboard,&nbsp;LinkedIn, and&nbsp;reddit.” data-reactid=”75″>Follow Yahoo Finance on TwitterFacebookInstagramFlipboardLinkedIn, and reddit.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Find live stock market quotes and the latest business and finance news” data-reactid=”76″>Find live stock market quotes and the latest business and finance news

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="For tutorials and information on investing and trading stocks, check out Cashay” data-reactid=”77″>For tutorials and information on investing and trading stocks, check out Cashay

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Get ready for an awful earnings season – CNN

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.
Brace yourself: According to estimates compiled by FactSet, analysts predict that earnings for the S&P 500 plummeted nearly 45%, which would be the biggest drop since a 69% plunge during the depths of the Great Recession in the fourth quarter of 2008. Revenues are expected to have fallen more than 10%. Retailers, energy companies and industrial firms likely reported the biggest declines in sales and profit.
Financial firms take center stage this week. JPMorgan Chase (JPM), Wells Fargo (WFC), Goldman Sachs (GS), Bank of America (BAC) and BlackRock (BLK) are just a few of the big banks and asset managers that will post their latest results.
Trump warns stocks will 'disintegrate' if he loses. But stocks are climbing as Biden pulls ahead
“Now that we are getting through the first full quarter of Covid-19 lockdowns … the effects of the pandemic and resulting loss of economic activity are starting to show an impact,” Mark Doctoroff, managing director and global co-head of the financial institutions group for MUFG, said in an email to CNN Business.
Doctoroff said investors will be keeping a close eye on loan quality — especially after a recent spate of high-profile corporate bankruptcies. Consumers may have struggled to make auto and credit card payments as well, even as many banks have offered mortgage forbearance programs.
But Doctoroff added that there could be some bright spots to bank earnings. Profits from trading desks could be robust, thanks to the surge in stock market volatility. Financial firms may also post solid results from their debt underwriting businesses. Companies have been rushing to issue new bonds as interest rates remain near zero.
Banks won’t be the only companies in the earnings spotlight. Pepsi, Delta, Netflix and Dow components Johnson & Johnson (JNJ) and UnitedHealth (UNH) are also due to report their latest results.
It seems unlikely that many of these firms will provide much in the way of financial guidance due to the uncertain nature of the economy. For what it’s worth, analysts expect the profit picture to improve as the year progresses. And analysts now predict a big rebound next year, with profits expected to rise 12% in the first quarter and nearly 30% for all of 2021.
Hopes for a rapid, pronounced V-shaped recovery in earnings have been one of the main reasons why the overall market has rebounded so quickly from its March lows.
The S&P 500 is now down only 1.4% this year. It’s possible that the bear market is already over even though the overall economy remains weak and there are worries about another surge of Covid-19 cases in the United States. But the Federal Reserve has helped fuel expectations of a comeback with its trillions of dollars of loan programs.
“What you are looking at over the next 12 months is still a moderate recovery,” said Erik Knutzen, chief investment officer of multi-asset for Neuberger Berman, adding that there is a “titanic struggle” in the markets between bears focusing on weak fundamentals and bulls who have expectations for more stimulus.

Why Wall Street may be turning on US stocks

Is it time to look for stock buys outside the United States?
It’s a question investors are asking more and more as they ponder how long the massive run-up in US shares can continue.
Amazon, Apple and Microsoft race to $2 trillionAmazon, Apple and Microsoft race to $2 trillion
The numbers: The S&P 500 has risen 42% since its low point on March 23. Europe’s Stoxx 600 index has gained 31% since its March low.
But Wall Street strategists are increasingly looking at European shares more favorably, noting the strength of the region’s recovery from Covid-19 and seeing opportunities to tap value.
Last week, BlackRock downgraded US equities to a “neutral” rating, warning that a surge in coronavirus cases could hit the recovery just as support for more government stimulus starts to wane. Its strategists said they now favor European shares, citing robust public health measures and a “ramped-up” policy response.
They’re not the only ones. On a recent call with reporters, Evan Brown, head of multi-asset allocation strategy at UBS, praised German Chancellor Angela Merkel for quickly moving to roll out fiscal stimulus measures. There’s a lot of room for Europe to outperform, he said.
The counterargument: The massive rebound in US stocks has been driven by surging shares in companies like Apple, Amazon, Microsoft and Alphabet, which helped push the Nasdaq toward a series of all-time highs last week. There’s no reason to think these companies will falter soon.
Brian Belski, chief investment strategist at BMO Capital Markets, said Friday that he believes US tech stocks can keep outperforming over the next 12 to 18 months given expectations for longer-term growth. But he told clients that selectivity may be increasingly important, and encouraged them to look beyond the traditional Big Tech names.
Monday: PepsiCo (PEP) earnings
Tuesday: US inflation data; UK balance of trade; Germany economic sentiment; Citigroup (C), Delta Air Lines (DAL), JPMorgan Chase (JPM) and Wells Fargo (WFC) earnings
Wednesday: US industrial production; Goldman Sachs (GS) and UnitedHealth (UNH) earnings
Thursday: China GDP; US initial unemployment claims and retail sales; Bank of America (BAC), Charles Schwab (SCHW), Honeywell (HON), Johnson & Johnson (JNJ), Morgan Stanley (MS), Truist (TFC) and Netflix (NFLX) earnings
Friday: US housing starts and building permits; BlackRock (BLK) earnings

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The Most Desirable Crude Oil On The Market – OilPrice.com

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The Most Desirable Crude Oil On The Market | OilPrice.com

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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    China bought up so much oil during April and May’s oil price crash that now they don’t know what to do with it all. A huge volume of the purchases that Beijing made when the market was down are just now coming into port, and China simply can’t get them all into storage fast enough. And as China’s seas fill up with oil tankers, the country’s onshore storage tanks are filling up too–and they’re getting dangerously close to overflowing As China’s own Caixin News reported earlier this week, “as of Wednesday, China had used up 69% of its crude oil storage capacity with the 33.4 million tons it had stockpiled, up by 24% from the previous year, according to data from energy information provider Oilchem China. That’s only 1 percentage point away from the 70% threshold that experts view as the country’s capacity limit.”

    This week, Bloomberg told the story of just one of these ships currently crowding Chinese ports. “Leaving behind the waters of the Caribbean Sea, the 1,100-feet long oil tanker Maran Apollo is emblematic of the wider petroleum market,” the report begins. “Steaming at 11.5 knots, she’s heading toward China, where oil demand is fast recovering, hauling a cargo of two million barrels of U.S. crude. But her voyage didn’t start a few days ago. She loaded in early May, and with no buyers during the worst of the coronavirus outbreak, the supertanker stood floating in the U.S. Gulf of Mexico for almost two months, waiting for better times.”

    The fact that Maran Apollo has now departed for Rizhao, China is a promising one, indicating that refiners are finally starting to demand more crude that has been sitting unwanted for months out at sea. But it’s not just any kind of crude. In order to really understand the oil industry’s uneven recovery, you have to look a little closer. 

    “Refiners are competing for barrels in one corner of the market known as medium-heavy sour crude — barrels with a higher content in sulfur and relatively dense. It’s the kind of oil that Saudi Arabia and its allies pump. And also the type of crude that’s pumped offshore in the U.S. Gulf of Mexico — and that’s what’s in the Maran Apollo’s tanks.” Bloomberg compares different kinds of crude oil to different vintages of wine. “Urals of Russia and Arab Light from Saudi Arabia are normally two of the most widely consumed — think Cabernet Sauvignon, maybe a Merlot. But in today’s oil market, such crude is in increasingly short supply due to record output cuts by the two nations and their allies.”

    Related: Saudi Arabia Hikes Oil Prices For The Third Consecutive Month

    The production cuts from OPEC+ don’t just remove any old crude oil from the oversaturated market, they remove the most in-demand kinds of crude, and its absence has caused problems for an energy industry trying to get back to business-as-usual. “Deep OPEC+ cuts and demand recovery have tightened balances and this has been reflected in improvements in physical differentials,” Bassam Fattouh, director of the Oxford Institute for Energy Studies, was quoted by Bloomberg. “But the recovery has not been even, with medium-sour crudes faring better than light-sweet crudes.”

    The shortage of medium-sour crude, and “particularly those known as light sweet crude that have a lower sulfur content and are less dense” has also upset conventional price brackets for crude oil. Usually, these barrels are plentiful and inexpensive, but as austere production cuts have removed so much medium-sour crude supply from the market, these barrels’ prices have soared. 

    While recovering oil prices can be seen as a sign of success for OPEC+ and their production curbing strategies, they don’t necessarily indicate a healthy market for oil. “Not only is medium-heavy sour crude trading at a premium to benchmarks, but barrels for immediate delivery are commanding premiums to forward contracts, a price pattern known as backwardation that also reflects a tight physical-market,” writes Bloomberg. As the world slowly returns to normal, markets will have to absorb the often unpredictable impacts of economic intervention like stimulus packages and production cuts on top of all the other externalities of economic recession. No one said the road to recovery would be easy. 

    By Haley Zaremba for Oilprice.com

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