While the recent release of Canadian bank earnings shows no similar capital issues at Canada’s largest banks, the real risk is the economic contagion that could result from a rollover in the housing market. The Canadian economy has become dependent on the strong housing market to sustain growth in construction, building trades and associated service industries that are all tied to a strong housing market. Those risks were not lost on Moody’s Investor Services, which downgraded the outlook for the Canadian Banks on the “expectation of a more challenging operating environment for banks in Canada for the remainder of 2017 and beyond, that could lead to a deterioration in the banks’ asset quality, and increase their sensitivity to external shocks”:

In another debt-related story, Moody’s downgraded China’s credit rating, changing its outlook to stable from negative, citing concerns efforts to support growth will spur debt growth across the economy. Official growth targets are also moving down, but probably more slowly. The one-notch downgrade marks the first time Moody’s has lowered China’s credit rating in almost 30 years. It last downgraded the country in 1989. It comes as the government moves ahead with its ambitious reform agenda, which it hopes will move the country away from its traditional dependence on manufacturing and towards a services-led economy. Moody’s argues, however, that these aims will be hampered somewhat by the country’s “economy-wide debt”, which it says is set to rise as economic growth slows. The size and the trends in the debt as well as the debt servicing capacities of the institutions that have that debt are the main source of risk. Unsurprisingly, China’s finance ministry didn’t agree with the move.

Another big focus for markets last month was the OPEC meeting on May 25th, in which members agreed to extend their production cuts for another nine months after they were set to expire in June. The hope was that the strong compliance with the 1.8 million barrel per day production cuts by OPEC and non-OPEC members would move the market back into balance and start to reduce global inventories from record high levels. The compliance with the initial cuts was much stronger than in the past, with Saudi Arabia and Russia each cutting more than their promised amounts. But oil prices have not moved significantly higher as they initially moved into the mid-50s after the deal was first announced last November and then fell back to US$45 before rallying into the May 25th meeting. Even though OPEC agreed to extend the production cuts for another nine months, they did not add further to the existing cuts.

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