Business and Finance

Financial markets focused on central bankers Tuesday morning, amid indications that the easing of interest rates in the United States is at an end.

Wall Street stock index futures pointed to a weak opening and overseas markets were lower after Federal Reserve chairman Ben Bernanke indicated interest rates might have to rise to forestall inflation.

The Bank of Canada, meanwhile, releases its policy decision, with market players widely expecting a quarter-point reduction in the overnight rate to 2.75 per cent – an expectation which has helped prod down the Canadian dollar by about three cents since the end of May.

The loonie pulled back further Tuesday, trading at 97.13 cents US, down 0.76 cent from Monday's close.

Private-sector economists see the outlook for further rate decreases in Canada as doubtful, as inflation worries increase and the Federal signals its rate-cutting is over.

Bernanke sent the clearest signal yet late Monday, saying U.S. growth appears weak in the current quarter but "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

He stressed inflation concerns, observing that "the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations."

Bernanke added that the Fed "will strongly resist an erosion of longer-term inflation expectations" – strengthening expectations that the U.S. central bank will hold the cost of short-term money steady at its next meeting June 24-25 and probably through much of this year, with moves beyond then more likely to be up than down.

Oil prices revived Tuesday, gaining $1.42 to $135.77 on the New York Mercantile Exchange. That was off from last week's peak of $139.12 a barrel after a $4.19 pullback Monday, but many traders expect another move higher amid global supply and demand concerns and jitters over factors ranging from geopolitics to the weather.

"The market is taking a breather after the very sharp gain last week but it's undeniable we have a strong uptrend in the oil markets," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"The market is still prone to further price spike."

Shum said supplies could be hit if hurricanes hurt production in the Gulf of Mexico, and anxiety continues over an Israeli cabinet minister's warning last week of an attack on Iran if it doesn't halt its nuclear program.

Asian stock markets sank Tuesday, with China's main index dropping 7.7 per cent on the country's latest move to tighten credit and restrain inflation fast cash online. The Chinese government ordered banks to keep more deposits on hand.

The benchmark Shanghai composite index fell 257.34 points to 3,072.33, and Hong Kong's Hang Seng index dropped 4.2 per cent to 23,375.52.

"Investors are concerned about a total meltdown and they just want to get out of the market," said Alex Tang, head of research at Core Pacific-Yamaichi in Hong Kong.

Elsewhere, Australia's benchmark index fell 2.8 per cent to 5,437.5, and Tokyo's Nikkei 225 closed down 1.1 per cent at 14,021.17 after dropping 2.1 per cent Monday.

Losses were less intense in Europe, with London's FTSE 100 index off about 0.5 per cent near midday.

In Canadian company news, Major Drilling Group International Inc. (TSX: MDI) – a major international success from its headquarters in Moncton, N.B. – predicts continued strong growth after its best-ever financial year. The global mine-industry drilling provider earned $25.4 million in its fourth quarter ended April 30, up 43 per cent from a year earlier as revenue increased 32 per cent to $170 million.

And CAE Inc. (TSX: CAE), another Canadian global leader in its field, has won a contract worth C$24 million to provide two full-mission simulators for the new BAE Systems Hawk 128 advanced jet training aircraft. CAE said the contract with Lockheed Martin, working for the U.K. military, could expand to $48 million if options are exercised.

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