The Canadian stock market rally continued for an 8th straight day yesterday as commodity stocks took off following the latest moves by the U.S. Federal Reserve to break the credit crisis, getting lending going again and reduce the cost of borrowing money for business and consumers.
Toronto’s S&P/TSX composite index rose 0.71% to 8,690.49, adding up 1,100 points or 15% since the stock market rally started last week by positive earnings news from the U.S. banking sector.
The Canadian dollar gave up some of the earlier gains in the day but still ended up $0.56 to $0.808 US because of weakness in the American currency. The US dollar is depreciating at a very quick pace relative to global currencies after the Fed announced its plan to inject over a trillion dollars into to economy which includes buying up to US$300 billion in long term government bonds during the next 6 months.
Statistics Canada said Canada’s annual inflation rate rose to 1.4% in February from 1.1% the previous month. This was the first increase in the cost of living or inflation in 5 months primarily driven by higher food prices. This is a positive sign since the risk of deflation (lower prices) is declining which is a good thing for an economic recovery.
Additional news on the economic front included the U.S. Labour Department saying that the number of initial requests for unemployment insurance dropped to a seasonally adjusted 646,000 from the previous week’s revised figure of 658,000, better than investors’ expectations. The number of people filing for more than a week set a new record for the 8th straight week, jumping 185,000 to a seasonally adjusted 5.47 million – there is a reason why they are injecting $1 trillion into the economy – things are bad!
The Toronto energy sector gained just over 4% with the price of oil hitting US $51.61 a barrel. The base metal sector gained 8% as copper prices jumped almost 5% and gold continued to advance by more than US$60 per ounce. The dramatic move by the U.S. central bank heightened worries about higher inflation. The TSX gold sector rose 3.75%. The Organization of the Petroleum Exporting Countries (OPEC) on Sunday said they would comply more strictly with deep supply curbs agreed to last year.
Saudi Arabian Oil Minister Ali al-Naimi, the group’s most influential voice (produced the most oil), said on Wednesday he believed OPEC had managed to put a floor under the market. “I think OPEC has succeeded in stabilizing prices,” he said. “The next thing is to hope for a gradual improvement in prices over time.”
In the United States, investors gave back some of the gains posted earlier in the week as they digested the implications of the Fed’s actions, as announced the prior day, fearing the moves could increase inflation in the long term. Financials, which have led the recent rally, led U.S. stocks lower with the KBW Bank index sliding 9.1%.
The Dow Jones industrial average fell 1.15%, the Standard & Poor’s 500 Index fell 1.30% and the Nasdaq Composite Index fell 0.52%.
On politics and waste
The U.S. Senate plans to vote next week on steep levies on employee bonuses after the U.S. House of Congress overwhelmingly approved a 90% tax on bonuses at American International Group (AIG) and other companies receiving bailout funds.
The 328-93 House of Congress vote came amid a national outcry over $165 million AIG paid in bonuses last week to more than 100 “top executives” after receiving $173 billion in bailout funds as part of the government’s efforts to stabilize credit markets. President Barack Obama said he was “stunned” by the bonuses and vowed to recoup the money.
Meanwhile, House Financial Services Committee Chairman Barney Frank proposed legislation late yesterday to ban payments at companies getting U.S. aid until the government is repaid in full.
This morning things are looking a little mixed to slightly down and it appears that stocks may take a little breather after such a dramatic run but don’t underestimate the momentum of the currently rally. We may have seen the worst but volatility will remain high and the stock market moves on news. If we have bad news the rally will end, if we have good news it will keep going since there is a lot of cash waiting to get back into stocks (rebalance). European and Asian stocks fell, trimming the MSCI World Index’s second straight weekly gain, on speculation that plans by the Federal Reserve and Bank of Japan to buy bonds won’t revive the economy.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
