Canada’s main stock index tumbled more than 3% yesterday as investors ‘booked’ recent profits. Stock endured a sharp drop in the price of oil and new concerns over the vitality of U.S. banks (although they are not out of the woods yet many have seen their stock prices appreciate significantly in the recent past).
The heavily weighted energy and financials sectors dropped 6.5% and 5.1%, respectively. The resource rich or gold rich materials sector added 2.7% as investors invested in gold, which is considered a defensive investment. The S&P/TSX composite index fell 3.3%. The composite index has a year low of 7,479.96 set on March 9th and is currently still well above 9,000
New concerns began to circulate around the health of the U.S. banking sector and the economy on Monday after Bank of America Corp reported a surge in troubled loans, which overshadowed its better than expected earnings. Bank of America shares plunged more than 24%, taking with them much of the financial services sector both in Canada and the United States.
Energy issues also retreated, as the renewed economic worries helped drag crude prices down by more than 8% to under $46 a barrel depressed by a rising U.S. dollar, growing caution about the pace of any economic recovery and its impact on oil demand.
The International Monetary Fund will cut global economic forecasts in the coming week, the agency’s head, Dominique Strauss-Kahn, said that he expected a recovery to start in the first half of next year. Oil has fallen nearly $100 from its record high of over $147 last July, trading around $50 for most of this month in part due to supply cuts by the Organization of the Petroleum Exporting Countries (OPEC). OPEC member United Arab Emirates’ oil minister Mohamed al-Hamli told reporters at a Dubai conference the oil market was “well supplied.” “A lot of refineries are not running at full capacity. A lot of oil is going into storage,” he said. “We’ve seen that stocks are building up. We’ve seen them go from 52 days to close to 59 days.”
U.S. stocks slid more than 3% yesterday as well. Wall Street’s tumble was broad based and follows a 6th week winning, the longest for the S&P 500 since 2007, with the Dow scoring its biggest gain over the period since 1938.
The Dow Jones industrial average declined by 3.56%, the Standard & Poor’s 500 Index declined by 4.28% and the Nasdaq Composite Index fell 3.88%. After the closing bell, IBM reported a bigger than expected fall in quarterly sales, showing that even one of the healthier U.S. technology companies was being hurt by a slowdown in spending.
The sharp sell-off was exacerbated by comments from Bank of America Chief Executive Ken Lewis that the already bad credit environment is getting worse. Adding to the bank worry, U.S. government officials have determined they can avoid asking Congress for more bank bailout funds by converting the existing loans to some U.S. banks into common stock, the New York Times reported. Such a move would dilute stockholders’ stakes. Fueling more bank concerns were comments from J.P. Morgan Securities, which said it estimates U.S. banks to incur $400 billion more in losses from the credit crisis and expects there will be a need for more capital for certain institutions.
The major indexes suffered their worst daily performance since March 5th but the S&P 500 remains up 23% from the bear market closing low on March 9th. The catalyst for the advance was some positive comments from banks and hopes that data signaled the economic slump may be moderating (but that assumption was challenged yesterday).
The Chicago Board Options Exchange Volatility index or VIX, which measures the S&P 500’s implied volatility or level of ‘fear’ jumped 15.4%, its biggest one day rise since January 20. Adding to the negative tone, U.S. President Barack Obama said over the weekend the economy remains under strain and his top economic adviser tempered hopes for a speedy recovery.
On the merger front, Oracle Corp. said it would buy Sun Microsystems for about $7.4 billion after Sun’s talks with IBM broke down earlier this month.
Today, the Bank of Canada will have its interest rate policy announcement. We would expect that the Bank will cut its overnight target 25 bps to 0.25%. Stocks continue to point down this morning.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
