Canada’s main stock index closed lower yesterday as falling commodity prices sent the resource-heavy index into a broad based decline that nearly erased all the gains made over the past 2 weeks.
Oil fell nearly 2% a barrel yesterday extending its retreat from a near 8 month high as the U.S. dollar firmed and stock markets tumbled. U.S. crude settled down $1.42 at $70.62, after optimistic signs of an economic recovery that could bolster flagging fuel demand sent crude above $73 a barrel last week. Oil has risen from around $51 at the end of April to hit near 8 month highs last Thursday on economic optimism, stirring concerns that investor speculation in the market has pushed oil prices up too high too fast. The energy sector posted the biggest sell-off, with a 3.4%, prices for oil and gold, both key Canadian exports, were dealt a blow by a U.S. dollar that rallied after Russia expressed confidence in the greenback as the world’s reserve currency.
French Economy Minister Christine Lagarde said G8 ministers want measures to curb volatility in oil markets, which put at risk growing signs that their economies are heading toward recovery. OPEC Secretary General Abdullah al-Badri said that a too-quick rise in oil prices could harm a global economic recovery, though he said a price of $80 a barrel would not stem growth. “Of course we do not want to see oil prices rising too rapidly and certainly not to harm growth in the global economy,” said al-Badri “We need a stable oil price.”
The head of the International Monetary Fund, Dominique Strauss-Kahn, also sounded a cautious tone on Monday, saying the worst of the global crisis was not yet over.
Last week the TSX was 43%, above the 5-year low of 7,479.96 reached on March 9th, which is now up 39% from that point. The S&P/TSX composite index ended down 250.18 points, or 2.35%, at 10,394.18. All 10 of its main sectors ended lower.
Some experts said the news that the opposition Liberals were threatening to topple the minority Conservative government and force a new election did not factor heavily into the TSX’s latest sell-off but the political uncertainty didn’t do the market any favors.
The Canadian dollar fell hard against the broadly firmer U.S. dollar on Monday, hitting its lowest level in more than 4 weeks on weaker equity markets and commodity prices. The greenback (U.S. dollar) strengthened after Russia expressed confidence in the U.S. currency (although, that could just be some talk) and the European Central Bank said euro zone banks face another $283 billion in write downs.
In the United States stocks tumbled, marking their worst slide in a month after regional manufacturing data dented optimism about the economy’s health and resource shares fell alongside commodity prices. After a series of signs the economy may be stabilizing, investors are looking for more definitive signals of its improving health. Analysts also said a pullback was unsurprising after a 3 month rally. Economists had expected to see slight improvement in the New York Fed’s Empire State index, but the survey showed the factory sector shrank at a much more severe rate in June than the previous month.
The Dow Jones industrial average 2.13%, the Standard & Poor’s 500 Index fell 2.38% and the Nasdaq Composite Index fell 2.28%. While the recent advance in commodity prices had helped stocks extend their rally, there has also been concern that a surge in oil and other commodities could hamper any economic recovery. Higher energy costs are a drag on consumer spending and corporate profits (for some sectors). The indices racked up their biggest one-day percentage loss since mid-May.
The CBOE Volatility Index known as Wall Street’s fear gauge, closed above the 30 level for the 1st time since early June, suggesting more volatility could be forthcoming. Investor sentiment also cooled after Goldman Sachs cut its rating on Wal-Mart to “neutral” from “buy,” saying it did not see a lot of positive catalysts to drive shares higher in the near term as expense pressures and tougher sales comparisons persist.
This morning European stocks advanced after German investor confidence rose to the highest in 3 years, adding to evidence that the worst of the recession is over. Europe’s Dow Jones Stoxx 600 Index added 0.5%. The index has jumped by 33% since the bottom on speculation the $12.8 trillion pledged by the U.S. government and Federal Reserve will end the deepest global economic contraction since the Great Depression. The rally has left the Stoxx 600 trading at 25.4 times earnings, the most expensive level since March 2004, weekly data compiled by Bloomberg show.
The ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations, which aims to predict economic developments 6 months ahead, increased to 44.8 this month from 31.1 in May, the highest since May 2006. Economists had expected a reading of 35, according to the median of 35 forecasts in a Bloomberg News survey.
Standard & Poor’s 500 Index futures added 0.3% before a Federal Reserve report that may show industrial production in the U.S. fell 1% in May. Other reports may show builders began work on more houses in May and wholesale prices rose elevating the deflation risk.
In short, we are not out of the woods yet although, there are some significant ‘green shoots’ stocks have also rallied significantly and they are not as cheap as they once were.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
