TORONTO, Aug. 16 /CNW/ - CIBC (CM: TSX; NYSE) - Financial markets are
expected to recover from current jitters as brisk growth in the global
economy, solid corporate fundamentals, and if necessary, rate cuts from
central banks, overcome continuing bad news in the US subprime mortgage
market, according to a report from CIBC World Markets.
    "Odds are that in the North American financial market, fear will be
overcome by favourable economic news, and that the current jitters will be
seen, with hindsight, as a buying opportunity for equities," says Jeff Rubin
Chief Economist and Chief Strategist at CIBC World Markets.
    He adds that the "underlying global growth and profit fundamentals remain
supportive for equities and corporate credit quality. US mortgages aside,
current equity and credit market selling pressure is more about fear than
reality."
    Mr. Rubin says the credit squeeze resulting from subprime defaults will
directly hit the ongoing housing recession in the US. However, the contagion
will likely remain concentrated there. "The hit to borrowing costs in the
Canadian economy looks manageable," he says.
    "Despite the huge widening in credit spreads, and the reduction in
liquidity in certain areas of the commercial paper market, there has not been
a systemic rise in defaults in the Canadian household debt market, or the
global corporate debt market, even in the segment financing highly-leveraged
buyouts," says Mr. Rubin. He also notes that Canadian corporate balance sheets
are in excellent shape.
    And while the spill-over of fear has been significant in equities,
high-yield currencies and commodities markets, the responses "look like
tremors rather than a full scale earth quake," says Mr. Rubin. He adds that
the 11% equity retreat in Canada is a correction that is frequently seen
during a generally bullish trend, including a larger sell-off earlier in the
bull run in 2006.
    In addition, "global growth has been twice as brisk as in the last credit
shock in 1998, when much of the world outside North America was mired in
recession following the 'Asian Crisis'," says Mr. Rubin. "With global growth
holding up in what is still a story centred on US housing credit, the TSX
overweight in energy and resources should prevent a replay of the 1998
pullback."
    "Canada's underweight in consumer stocks, which might be impacted by more
sluggish American household spending, could also be of benefit, and Canada's
stronger housing market implies less stress on household credit quality," says
Mr. Rubin.
    In the near-term however, Mr. Rubin expects the labyrinth of structured
assets "will amplify market perceptions of risk." However, "markets could
rationally become desensitized to the bad news on mortgage defaults and CDO
write-downs, both of which are now considerably priced in. With the aid of
central bank liquidity, and a fundamentally bullish outlook for world economic
growth, contagion effects are likely to be contained to a mid-cycle correction
in the stock market."

    The full CIBC World Markets StrategEcon report is available at:
    http://research.cibcwm.com/economic_public/download/saug07.pdf

    CIBC World Markets is the wholesale and corporate banking arm of CIBC,
providing a range of integrated credit and capital markets products,
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