Canada’s main stock index finished lower for a 4th straight day yesterday as investors continued to book gains after the index staged a remarkable rally from the 5-year low it hit in March.

The TSX index fell to its lowest closing level since May 22nd with the sell-off driven by commodity shares, which were hit by a drop in oil prices and news of a production cut at key fertilizer maker Potash Corp. Energy companies were among the loss leaders as the price of oil initially fell further from its 2009 high above $73 a barrel, reached last week. Crude managed to rebound late in the day, however, settling at $71.03. In the end, the energy sector fell 3.45%. Since the TSX hit an 8 month high of 10,726.01 last week, which put it 43% above the March low, many investors have opted to take profits. The S&P/TSX composite index ended down 241.29 points, or 2.34%, at 10.066.11.

The financial sector also dropped by 1.7% as they fell alongside their U.S. peers after Standard and Poor’s cut ratings on 18 U.S. banks. After the run that stocks have had recently they seemed to be priced for perfection which makes continued gains on the upside harder to sustain. Then again, they have already sold-off by more than 6% from last week which is the biggest drop that we have endured since prior to March 9th.

In the United States technology shares gained after positive broker comments on Qualcomm, but financial shares’ losses held back the Dow and the S&P 500. Banks were hurt by a broad debt ratings downgrade from Standard & Poor’s and uncertainty over the government’s extensive proposals for banking-industry reform. Analysts said there were no surprises in President Barack Obama’s plans to reshape financial regulation but uncertainty remained about the regulations’ impact on the financial system and the wider economy. In short, the extra regulation will reduce leverage available to some financial institutions which, although is a good thing systematically (no more bankruptcies) it does create a lower return on equity for investors which will ultimately mean lower rates of return for equity investors with a lower level of risk for all stakeholders. President Barack Obama laid out his vision for recrafting U.S. financial regulation, vowing to halt “a cascade of mistakes … over the course of decades” that eroded bank and market oversight. The plan takes on some tough jobs, such as forcing large financial firms to boost their capital cushions and regulating over-the-counter derivatives and securitized instruments. A centerpiece of the plan is vesting the Federal Reserve with new powers over “systemic risk” in the economy with the aim of preventing future disasters like September’s collapse of former Wall Street giant Lehman Brothers and the taxpayer bailout of mega-insurer American International Group (AIG). “My administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression,” the president said in a speech at the White House (this won’t be any easy sell and expect lots of ‘noise’ over this issue).

The Dow Jones industrial average fell 0.09%, the Standard & Poor’s 500 Index fell 0.14% and the Nasdaq Composite Index gained 0.66%.

On the economic front, the closely watched Consumer Price Index, released showed inflation is still not a worry. Canadian CPI this morning was higher than expected with headline at +0.1% and core at +2.0% over last year. The Bank of Canada has said it sees inflation remaining low for quite some time, and in turn, for rates to stay low for quite some time. There was nothing in these numbers to really contradict this view. The number of Americans receiving claims for unemployment benefits dropped for the first time since January, adding to the evidence that the job market is starting to thaw. The number of people collecting unemployment insurance plunged by 148,000 in the week to June 6, the most since November 2001, to 6.69 million, the Labor Department said today in Washington.

In Europe stocks are down almost 1% and in the United States stock futures are pretty flat

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner