Canada’s main stock index climbed more than 1.3% yesterday, rising oil and gold prices gave the index a big boost, however, profit taking by investors limited the gains. The index rose by as much as 2.6% shortly after the open, touching a 7 month peak of 10,365.39, as oil jumped to a 6 month high above $62 a barrel (flirting with $60 this morning), while gold climbed to an 8 week high above $940 an ounce.
The energy sector was up 2.17%, while the mining-heavy materials sector climbed 3.03% (which includes gold). In short, we have had an unbelievable run over the last 8 weeks but it is not unreasonable to expect a breather from time to time. The index has risen 35% since early March, as improving economic data and signs that credit markets are thawing (see below) have improved the hopes that a recovery may be around the corner. However, doubts about the strength of the economy (GM cut 43% of its Canadian dealers yesterday) mean that neither the economy nor the stock market are out of the woods.
Data that showed domestic inflation dropped to a 14-year low of 0.4% had little impact.
In the United States, stocks fell led by financials in a late stage sell-off (Europe is catching up this morning), after the Federal Reserve gave a more pessimistic view on the economy, reducing hopes for a quick recovery. The Fed cut its 2009 forecast for gross domestic product (GDP) and raised its outlook for unemployment, undercutting recent optimism that the economy might be turning the corner.
The Dow Jones industrial average dropped by 0.62%, the Standard & Poor’s 500 Index dropped by 0.51% and the Nasdaq Composite Index dropped 0.39%.
The cost of borrowing in dollars between banks dropped adding to evidence that policy makers are unfreezing credit markets. The London interbank offered rate (Libor), for 3 month dollar loans decreased to 0.66%, the British Bankers’ Association (BBA) said. Libor is used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA. The Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero as they sought to ease the flow of credit. Libor, one of the rates that determine everything from student loans to mortgages, rose to 4.82% in October in the wake Lehman Brothers collapse in September. The TED spread, the difference between what banks and the U.S. Treasury pay to borrow narrowed to 0.51% the least since August 2007, when the credit crisis began. It peaked at 4.64% on October 10, 2008. The Libor-OIS spread, another gauge of banks’ reluctance to lend that measures the difference in the 3 month rate and the overnight indexed swap rate, decreased to 0.46%, the least since February 2008. It has dropped from as high as 3.64% points in October.
Britain may lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II. Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a 1 in 3 chance of a ratings cut as debt approaches 100% of GPD.
There are ‘green shoots’ which appear to be stable however we are not out of the woods yet although the threat of a deep depression has certainly been significantly reduced with a viable credit market (although, banks will need to continue to raise capital and retain profits for a long time).
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
