Canada’s main stock index finished higher yesterday, but gave up earlier triple digit gains, as questions and concerns about the direction of the global economy weighed on stock markets.
The S&P/TSX composite index still appreciated in value but at one time climbed as much as 164 points in the afternoon (we will see if we recoup that today). The TSX energy group led gains, 1.7% higher, as the June crude contract rose 30 cents at US$48.85 a barrel on the New York Mercantile Exchange. The U.S. Energy Information Administration said that crude inventories rose by 3.7 million barrels to 370.6 million barrels, which is the highest level in nearly 19 years.
The International Monetary Fund is projecting a 1.3% drop in global economic activity this year, the 1st decline in 60 years. The new forecast of a decline in global economic activity for 2009 is much weaker than the 0.5% growth the IMF had estimated as recently as January.
Trading was volatile on both sides of the border as Wall Street climbed out of the red near midday only to tumble back into losses after news (including a boost of confidence from Treasury Secretary Timothy Geithner) and worries about the banking sector. Geithner told the Economic Club of Washington that the downturn is showing signs of moderation, though he emphasized the G20’s need to continue their stimulus efforts.
In the U.S. banking industry, Morgan Stanley reported a deeper than expected loss and reduced its dividend to basically zero in attempt to hoard cash. The banking giant was hurt by the deteriorating commercial real estate market in the United States. Capital One reported a US$176.1 million 1st quarter loss on increasing credit losses. The bank and credit card company also set aside more money for bad loans, and said a measure of losses in all of its businesses likely will be higher in 2009 than the $8.6 billion it previously projected. Wells Fargo which bought Wachovia last fall at the height of the credit crisis confirmed it earned $2.38 billion. That compares with a profit of $2 billion a year earlier.
Banks have been a key component in leading the six week stock market rally that drove the broad market indices up nearly 25% from March’s bear market lows.
The Dow Jones industrial average dropped 1.04%, the Standard & Poor’s 500 Index dropped 0.77% and the Nasdaq Composite Index gained 0.14% based on positive comments from AT&T and their iphone partnership with Apple.
This morning U.S. stock futures rose after Apple and EBay topped analysts’ sales and profit estimates last quarter, fueling expectations a consumer spending slowdown may have eased.
The S&P 500 is up 25% from a 12 year low on March 9th as government efforts to fix the financial system and revive economic growth fueled speculation a global recession is subsiding. Analysts estimate that profits at S&P 500 companies decreased for the seventh straight quarter in the January to March period, the longest stretch of declines since at least the Great Depression according to Bloomberg.
The market has come to the view or conclusion that given the stimulus packages we’ve seen we should be able to avoid the worst case that we worried about from November through February. Although investors will still worry about earnings we would expect leading economic indicators to pick up later in the year.
With the Bank of Canada’s key lending rate at a record low 0.25%, the central bank is expected to unveil today what other measures it might take to loosen credit markets and tackle the deeper than expected recession. The bank’s much anticipated monetary policy report, to be released at 10:30 a.m., will likely include the Bank’s views on more unorthodox approaches, such as “credit and quantitative easing,” to deal with the prolonged economic crisis. Quantitative easing involves the central bank buying assets such as government bonds, with the goal of pushing down overall yields and thus reducing borrowing costs. This is done, essentially, by printing new money and using it to buy these assets. Credit easing is a finer instrument, involving the purchase of assets in “credit markets which are important to the functioning of the financial system,” and may not involve creating new money, the Bank of Canada said in an earlier statement defining what it means by the terms quantitative easing and credit easing.
With little or no room to reduce benchmark interest rates further, central banks around the world are adopting or considering such measures to keep credit flowing as they run out of scope to lower benchmark interest rates further in order to stimulate the movement of money.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
