Canada’s stock market finished sharply higher yesterday, extending its winning streak to 6 days on the likelihood that CIT Group, a major U.S. financial institution, will avoid bankruptcy. Improving sentiment sent commodity prices higher. The S&P/TSX composite index jumped 1.6%, following a jump of more than 6% last week as a series of U.S. earnings reports raised hopes for an economic recovery. Sources say that U.S. business lender CIT Group has received a rescue loan of about US$3 billion from key bondholders hoping to keep it alive long enough to restructure its debt. The deal will not necessarily prevent a bankruptcy filing, but will give it a chance to survive while it attempts to refinance existing debt. CIT had been trying to reach a deal with the federal government for emergency funding before talks broke down last week. Investors were encouraged by signs that the CIT rescue was a private-sector measure instead of a government bailout. I think that’s a healthy sign for the market as a sign of liquidity and it shows a willingness of private participants to step up to the plate. It also shows that the government does not have to bail out every company.
The TSX energy sector moved up 2.35% with the August crude contract on the New York Mercantile Exchange 42 cents higher to US$63.98 a barrel. Toronto mining stocks also benefited from higher commodity prices. The gold sector added 2.5% as the August bullion contract on the NYMEX rose $11.30 to US$948.80 an ounce. The base metals sector was ahead almost 5% as the September copper contract rose 4.6 cents to US$2.469 a pound. The financial sector also rose, up 1.3%. Investor sentiment has clearly and dramatically changed in the last 6 days and investors were betting that corporate America would log another strong set of earnings this week.
Today the Bank of Canada makes its next announcement on interest rates, the Canadian dollar added to last week’s strong advances, as the dollar benefited from a weaker U.S. dollar and the strong showing on the stock markets. The Canadian dollar jumped ¾ of 1 cent to 90.35 cents US after adding 3.74 US cents last week.
In the United States stocks also jumped, driving the S&P 500 to an 8 month closing high, after CIT Group was thrown a lifeline to avoid bankruptcy. Brokerage upgrades of technology bellwethers, including Cisco Systems propelled the Nasdaq to its 9th straight daily advance matching a streak from July 1998. The Nasdaq closed at a high for the year.
The Dow Jones industrial average jumped 1.19%, the Standard & Poor’s 500 Index jumped 1.14% and the Nasdaq Composite Index jumped 1.20%. Monday’s rally extended the U.S. market recovery since the 12-year lows in early March 9th. The Nasdaq hit its highest close since October 2008, while the Dow hit its highest close since January 2009. Analysts who focus on technicals analysis expect more upward momentum after the S&P 500 punched through near term resistance at the 950 level for the S&P 500. Coming into this week, 71% of 55 S&P 500 companies that have reported so far beat expectations, according to data compiled by Thomson Reuters. Driven higher by corporate earnings, the broad S&P 500 finished up 7% last week, its best week since mid-March. At Monday’s close, the S&P 500 was up 40.6% from the 12-year closing low of March 9th.
On the economic data front, an index gauging U.S. economic prospects increased for a 3rd straight month in June, suggesting the recession was drawing to a close, the Conference Board said.
In short, things are slow but surely getting better. Quarterly corporate results have exceeded investor expectations and this is very good for stock markets. The U.S. recession’s grip on the economy appears to be easing but likely has not yet ended, according to a survey of economists released on Monday. The National Association for Business Economics’ quarterly industry survey found that demand is stabilizing, but a small majority of the 102 respondents said their firms had not yet seen the bottom. The survey “provides new evidence that the U.S. recession is abating, but few signs of an immediate recovery,” said Sara Johnson, managing director “Industry demand was still declining in the 2nd quarter of 2009, but the breadth of decline had narrowed considerably since late 2008, raising prospects for stabilization in the 2nd half of the year.” The U.S. recession, which dates to November 2007, is the longest since the Great Depression and the deepest in decades. Most economists look for growth to return in the 2nd half of the year, but they caution that the recovery is likely to be sluggish.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
