The Canadian stock market posted a solid gain yesterday. Stronger oil prices and optimistic comments from U.S. Treasury Secretary Timothy Geithner were key contributing factors.
The modest advance in oil prices boosted the heavily weighted energy group by 1.86%, while financials jumped by 2.8% after Geithner said the majority of U.S. banks have more capital than they need in order to be considered well capitalized against the credit market and the global recession.
I think the treasury secretary’s comments served to give investors some assurance.
The S&P/TSX composite index climbed 1.33%, overcoming weakness just after markets opened. The gain follows a 3.3% drop on Monday but comes as equity markets have been on a steady, upwards trajectory since March 9th. This is despite continued worries over the strength of the global economy and the health of the international credit markets.
To some extent investors would be relieved if the market stopped advancing for a bit and then resumed from there.
Before markets opened, the Bank of Canada predicted the economy would contract a deeper than expected 3% this year, as it cut its benchmark interest rate to 0.25% (a.k.a. ¼ of 1%) and said the rate would stay in place for the next year.
The Bank of Canada has taken its key policy interest rate to the lowest practical level in an effort to combat what it says has become a deeper than expected economic slump.
The commercial banks quickly cut their prime lending rate in step with the Bank of Canada’s move. They were led by Bank of Montreal which announced two minutes after the central bank’s announcement that the benchmark for variable rate mortgages and other loans was dropping to 2.25%. Some fixed mortgage rates were also trimmed.
In addition, Carney will be outlining options for quantitative easing (adding to the money supply) on Thursday, after embracing a new and darker outlook. “The recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0% in 2009,” the bank’s statement said.
It noted that “in an environment of continued high uncertainty,” the global recession has intensified since the start of the year, and fiscal and monetary measures to stabilize the financial system “have taken longer than expected to enact.”
The central bank sees no danger of inflation, it predicts prices will drop at a 0.8% rate in the 3rd quarter and not return to its 2% target before the 3rd quarter of 2011.
The central bank also said it will target a daily level of settlement balance in the financial system at $3 billion, a move it says will help drive the overnight rate to the bottom of the trading band (in short, start printing money by giving unencumbered access to capital by the banks).
In the United States, the big news was Treasury Secretary Timothy Geithner indicating that stress tests will show most of the 19 biggest U.S. banks have enough capital. Testifying at a congressional oversight panel yesterday, said each bank needing aid after the tests gauging their health would work with supervisors on the options, including tapping the $700 billion Troubled Asset Relief Program.
Geithner also repeatedly stated that regulators — not the Treasury — are taking the lead on the exams or stress tests. The remarks helped ease investors’ concerns about the results of the reviews, including the risk of political interference and the prospect for widespread stock dilutions among the 19 banks under scrutiny. Financial shares jumped, sending benchmark indexes up the most in almost two weeks.
Geithner wouldn’t have said what he said at the hearing if he was concerned about the outcome of the tests and in turn, investors recognize that there’s less of a headwind.
The Standard & Poor’s 500 Index added 2.1%, the biggest gain since April 9th , Citigroup Inc., JPMorgan Chase and Bank of America Corp., all of which have taken federal bailout money, climbed at least 9%. Banks may get preliminary results from the tests on April 24th the same day the Federal Reserve is expected to release the methodology of the assessments, people briefed on the matter have said. While final results are scheduled for May 4th, regulators have yet to agree on how they will be published (although, there have been lots of leaks).
The Federal Reserve is leading the assessments, which are designed to ensure that firms have enough capital to weather a deeper economic downturn over the coming two years.
Geithner also said there were signs of “thawing” in credit markets and some indication that confidence was beginning to return. Even amid some improvement, he warned that bank reports show “significant declines” in commercial and industrial lending and consumer loans such as credit cards. Also, credit costs remain high, even if they recently have declined somewhat, he said.
At yesterday’s hearing, committee members were skeptical of the Treasury’s strategy for the bailout and questioned whether Geithner was doing enough to protect taxpayers. “The public and this panel have a right to know how Treasury defines success,” said Representative Jeb Hensarling, a Texas Republican. “For many it is difficult to discern.”
Hensarling said he was particularly concerned about the potential for nationalizing banks and about the expansion of a program that was conceived to help the financial industry but is now also aiding automakers and their suppliers. “Is there any firm that is beyond the reach for taxpayer bailout assistance?” he asked. “At what point does Starbucks get in line?”
Earnings from a handful of blue-chip companies also boosted sentiment, led by United Technologies as the industrial bellwether forecast a return to growth next year. This in combination with favourable comments regarding the stress tests offset the initial concerns established on Monday when stocks dropped.
The Dow Jones industrial average added 1.63% and the Nasdaq Composite Index added 2.22%.
We appear to be turning a corner and investors with a longer term view should be optimistic. We have experienced incredible levels of volatility as the stock market became oversold and quickly bounced back. We are going to have to expect more volatility for the remainder of 2009. In addition, many market observers and government officials are now suggesting that the economic slump may not bottom out until 2010. We are not out of the woods yet and we have a long way to go but investors with some courage will find opportunities amongst the chaos.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
