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CIBC Weekly insight from Benjamin Tal

By
Mortgage and Lending with Allison Tolley Lethbridge

Weekly Market Insight

July 11, 2008

NORTH AMERICAN & INTERNATIONAL ECONOMIC HIGHLIGHTS

The US stock market is officially in a bear market and the TSX lost more than 6% since the beginning of July. A

year from now we will refer to the current period as the "bad times".

But between now and then, what will define the next six to twelve months? The following is a brief list of the

main themes that we think will dominate the economy and markets in the near term.

Economic Activity

We are probably at the bottom of the cycle. In the US, the economy is probably shrinking and in Canada, we

are starting to see growing consistent signs that the labour market is slowing. We probably will stay at this

bottom for a few more months with some early signs of a sustained recovery becoming visible in the fourth

quarter of 2008.

Inflation

The trend is up. The main reason for higher inflation down the road is surging energy and food prices. Note

that until recently the Fed and the Bank of Canada were focusing only on core inflation (which excludes food

and energy prices). But realizing that the current rise in food and energy prices is more structural in nature,

both central banks are now focusing more and more on "all-items" inflation that includes the food and energy

components. Accordingly, look for US inflation to reach 4.2% by year-end. In Canada, we have not yet felt the

impact of higher food prices due to the appreciation of the dollar. But in economics almost everything is

determined at the margin. And with the Canadian dollar remaining more or less at current level, food inflation

will no longer be protected by a rising currency, and therefore it will take overall inflation in Canada to 3% by

year-end.

Interest Rates

With inflation rising and the economy slowing, we are in stagflation. The Fed and the Bank of Canada are in a

difficult position since raising rates now to fight inflation will further damage an already fragile economy. So

what to do? The best guess is that both central banks will wait until the end of the year, when the signs of a

sustained recovery are extremely clear before starting to raise rates. Accordingly, we expect the Fed to raise

rates by 150-200 basis points and long-term rates in the US to rise by roughly 60-70 basis points. In Canada,

with inflation a bit lower and economic growth stronger than in the US, the Bank will probably raise the bank

rate by only 100 basis points with long-term rates rising by only 30-40 basis points.

The Stock Market

The US market is officially in bear territory and probably will stay there for a while. Given current sentiment, it

is hard to see a recovery in the near term. In fact, we expect additional sell-offs in the very near term. In terms

of the duration of the market decline, we are still 2-3 months short of the average duration of all previous bear

markets as the magnitude of the decline is still 5%-10% short than the average. Having said that, we believe

that the market is cheap (and probably will get cheaper in the coming months or two). This means that

currently there are many opportunities from a 2-year investment horizon perspective.

Economics & Strategy

CIBC WORLD MARKETS INC.

Weekly Market Insight July 11, 2008

2

In Canada, the recent decline in the stock market reflects the ongoing impact of the credit crunch on the

financial as well as general fears that the stagflationary conditions will further damage the Canadian economy.

The energy sector will remain relatively robust due to our belief that energy prices will remain elevated. Overall,

it is difficult to see a sustained recovery in the TSX before there are convincing signs that the US market has

reached a bottom. As is the case in the US, at current valuations, the non-commodity segment of the market is

very cheap.

Benjamin Tal

Senior Economist

CIBC WORLD MARKETS INC.

Weekly Market Insight July 11, 2008

3

International Stock Indexes

Thursday, July 10, 2008

YTD 3-yr

High Low - + % chg % chg

World DJ World Index 258.45 255.86 257.88 -0.26 -0.1 0 -14.3 320.33 257.88 -17.3 6.6

World DJ World ex U.S. 234.16 231.14 232.03 -1.64 -0.7 0 -14.6 291.11 230.68 -16.6 11.1

World MSCI EAFE* n.a. n.a. 1896.38 -21.57 -1.12 0 -15.8 2388.74 1886.68 -18.2 9.1

Asia-Pacific DJ Asia-Pacific 136.73 135.06 136.28 0.37 0 0.27 -13.8 172.49 133.78 -16.4 9.2

Australia All Ordinaries 5067 4999 5020.5 -68.9 -1.35 0 -21.8 6853.6 5020.5 -21.6 6.2

Australia S & P/ASX 200 4986.7 4916.9 4937.4 -74.5 -1.49 0 -22.1 6828.7 4932.9 -22.4 5.3

China DJ CBN China 600 24524.88 23686.62 23844.45 -357.81 -1.48 0 -42.4 44631.83 21535.15 -20.3 43.6

China Dow Jones China 88 266.4 257.13 259.62 -3.33 -1.27 0 -45 530.54 236.45 -22 40.1

China Shanghai Composite 2952.04 2862.06 2875.45 -45.1 -1.54 0 -45.3 6092.06 2651.61 -26.6 n.a.

Hong Kong Hang Seng 22020.66 21498.87 21821.78 15.97 0 0.07 -21.5 31638.22 20387.13 -4.3 16

India Bombay Sensex 14046.59 13763.94 13926.24 -38.02 -0.27 0 -31.4 20873.33 12961.68 -7.7 24.5

Indonesia Jakarta Composite 2276.23 2241.92 2276.23 -9.8 -0.43 0 -17.1 2830.26 1908.64 -0.4 27

Malaysia Kuala Lumpur Composite 1141.97 1129.93 1135.49 -4.32 -0.38 0 -21.4 1516.22 1121.25 -16.9 7.9

New Zealand NZSX-50 3177.46 3112.49 3112.56 -64.9 -2.04 0 -23 4332.29 3094.42 -26.6 -1.5

Pakistan KSE 100 11773.12 11702.52 11773.12 -23.35 -0.2 0 -16.4 15676.34 11162.17 -16.7 15.8

Philippines Manila Composite 2466.46 2446.54 2450.62 -30.91 -1.25 0 -32.3 3873.5 2339.84 -34.8 9.3

Singapore Straits Times 2902.33 2875.61 2901.58 -16.04 -0.55 0 -16.3 3831.19 2792.75 -18.1 10.4

South Korea Kospi 1542.34 1495.44 1537.43 18.05 0 1.19 -19 2064.85 1519.38 -19.5 14.6

Sri Lanka Colombo Stock Exchange 2409.11 2381.58 2405.6 23.99 0 1.01 -5.3 2681.27 2354.98 -2.8 7.2

Taiwan Weighted 7141.02 6976.6 7075.65 27.4 0 0.39 -16.8 9809.88 7048.25 -24.4 4.5

Thailand SET 727.47 713.19 721.86 0.73 0 0.1 -15.9 915.03 721.13 -14.5 3.9

Japan Nikkei Stock Avg 13139.85 12930.32 13067.21 15.08 0 0.12 -14.6 18238.95 11787.51 -27.3 4.2

Japan Nikkei 300 264.77 260.49 263.46 0.94 0 0.36 -12.5 358.46 234.2 -25.6 5.5

Europe DJ Stoxx 600 282.41 276.94 277.95 -5.95 -2.1 0 -23.8 399.71 277.95 -30 -0.1

Europe DJ Stoxx 50 2871.33 2820.99 2833.72 -52 -1.8 0 -23.1 3998.93 2833.72 -28.7 -2.7

Euro zone DJ Euro Stoxx 50 3325.11 3265.21 3283.01 -59.5 -1.78 0 -25.4 4557.57 3275.2 -27.3 0.6

Euro zone DJ Euro Stoxx 314.45 308.96 310.38 -6.09 -1.92 0 -25.2 441.18 310.38 -29.2 1.8

Austria ATX 3793.55 3673.41 3676.86 -116.4 -3.07 0 -18.5 4926.07 3524.64 -25.2 5.9

Belgium Bel-20 3070.16 3011.17 3022.3 -64.32 -2.08 0 -26.8 4645.08 3010.44 -34.8 -0.9

Czech Republic PX 50 1451.5 1430.9 1448.5 -6.7 -0.46 0 -20.2 1936.9 1405.1 -23 5.8

Denmark OMX Copenhagen 380.44 375.17 378.18 -2.26 -0.59 0 -15.7 492.84 368.52 -21.7 6.3

Finland OMX Helsinki 8435.5 8296.66 8344.53 -90.97 -1.08 0 -28.1 12656.77 8256.47 -28.7 4.1

France CAC 40 4293.12 4209.64 4231.56 -108.1 -2.49 0 -24.6 6125.6 4231.56 -30.7 -0.5

Germany DAX 6384.64 6254.31 6305 -81.46 -1.28 0 -21.8 8105.69 6182.3 -21.7 11.1

Hungary BUX 20879.07 20534.52 20558.86 -260.91 -1.25 0 -21.6 30118.12 19870.33 -29.7 1.9

Italy S & P/MIB 28827 28319 28437 -334 -1.16 0 -26.2 42367 28306 -32.5 -4.6

Netherlands AEX 407.95 399.29 401.93 -8.9 -2.17 0 -22.1 561.9 401.93 -28.2 1.1

Norway All-Shares 512.23 503.91 504.31 -7.92 -1.55 0 -11.5 605.05 442.79 -15.8 15.1

Poland WIG 40163.52 39606.23 39632.83 -370.2 -0.93 0 -28.8 66045.6 39429.79 -39.9 11.1

Portugal PSI 20 8778.05 8653.53 8678.1 -173.61 -1.96 0 -33.3 13702.03 8486.91 -35.7 5.1

Russia DJ Russia Titans 10 6833.15 6753.01 6792.22 -4.95 -0.07 0 -11.4 7920.96 6226.15 -5.1 40.7

Russia RTS Index 2191.74 2163.44 2186.35 7.5 0 0.34 -4.5 2487.92 1820.3 6.7 43.7

Spain IBEX 35 11892.4 11699.5 11739.5 -260.3 -2.17 0 -22.7 15945.7 11739.5 -21.4 6.2

Sweden SX All Share 273.76 268.26 268.58 -5.18 -1.89 0 -23.7 427.24 268.58 -36.9 1.2

Switzerland Swiss Market 6871.49 6763.87 6803.07 -118.37 -1.71 0 -19.8 9299.8 6772.74 -26.4 2.5

Turkey Istanbul National 100 36039.19 35105.76 35574.64 -28.63 -0.08 0 -35.9 58231.9 33208.24 -31.6 8.5

U.K. FTSE 100 5529.6 5392.6 5406.8 -122.8 -2.22 0 -16.3 6730.7 5406.8 -19.3 1.1

U.K. FTSE 250 8654.6 8499.3 8519.9 -134.7 -1.56 0 -20.1 11922.9 8480.1 -27.9 4.3

Americas DJ Americas 331.83 326.18 330.62 2.34 0 0.71 -12.3 399.86 328.28 -15.9 4

Argentina Merval 1940.32 1916.6 1940.15 -7.63 -0.39 0 -9.8 2351.44 1833.71 -15.2 11.8

Brazil Sao Paulo Bovespa 60588.93 58337.52 60252.74 716.79 0 1.2 -5.7 73516.8 48015.55 4.6 35.1

Canada S & P/TSX Comp 13776.48 13572.63 13743.88 133.04 0 0.98 -0.6 15073.13 12132.13 -4.3 10.5

Chile Santiago IPSA 2833.08 2797.85 2803.82 -19.62 -0.69 0 -8.1 3496.18 2427.11 -16.9 10.8

Mexico IPC All-Share 28101.94 27499.56 27877.33 -218.46 -0.78 0 -5.6 32836.12 25284.88 -13.6 26.2

Venezuela Caracas General 39040.62 37843.68 37941.22 -982.51 -2.52 0 0.1 42249.77 34172.43 -6.3 20.2

Egypt CASE 30 9572.73 9462.55 9566.59 56.64 0 0.6 -9.3 11935.67 7517.75 14.6 n.a.

Israel Tel Aviv 1031.41 1012.99 1023.42 -3.24 -0.32 0 -15.9 1237.13 964.38 -10.9 16.7

South Africa Johannesburg All Share 28009.41 27650.78 27687.48 -321.93 -1.15 0 -4.4 33232.89 25135.13 -7.1 24.2

*Europe, Australia, Far East; U.S.-dollar terms

Three year percent change is annualized.

Sources: Reuters; WSJ.com

DAILY 52 WEEK

Region/Country Index Close Chg High Low % Chg

% Chg

Other Countries

World

Asia Pacific

Europe

Americas

CIBC WORLD MARKETS INC.

Weekly Market Insight July 11, 2008

4

MARKET INDICES Jul 10 a month ago a year ago

S&P/TSX Composite 13743.88 14736.20 14131.93

S&P 500 1253.39 1358.44 1510.12

Dow Jones Industrial Average 11229.02 12289.8 13501.7

INTEREST / FX RATES Jul 11 a month ago a year ago

Prime Can (%) 4.75 4.75 6.25

Prime US (%) 5.00 5.00 8.25

30 Day BA Can (%) 3.150 3.145 4.58

3 month US T-Bill (%) 1.65 1.96 4.96

3 month Can T-Bill (%) 2.321 2.790 4.574

10yr US Bond (%) 3.836 4.176 5.11

10yr Can Bond (%) 3.68 3.86 4.66

10yr-2yr US Spread (bps) 138.00 127.00 17.70

10yr-2yr Spread Can (bps) 59.00 51.00 -2.00

US$/Cdn$ 0.9905 0.9742 1.0477

US$/Euro 1.5914 1.5345 1.3794

Yen/US$ 105.980 108.000 122.0440

118 34

INTERNATIONAL INTEREST RATES Jul 11

3 mo LIBOR (%) Spread vs US (bps) a wk ago (Spread-bps)

United States 2.79 NA NA

Canada 3.43 64 68

Euro-zone 4.96 217 217

Switzerland 2.80 1 1

Japan 0.92 -187 -186

Australia 7.76 496 500

10 Year Bond (%) Spread vs US (bps) a wk ago (Spread-bps)

United States 3.84 NA NA

Canada 3.68 -15.6 -25.5

Euro-zone 4.92 108.3 100.7

Switzerland 3.12 -71.6 -71.7

Japan 1.59 -224.2 -233.5

Australia 6.36 252.8 244.8

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