Canada’s main stock market advanced yesterday as a rally in oil prices pushed energy shares higher and left the index just shy of its highest level in nearly a year. Oil prices jumped more than 2% to top $71 a barrel as the U.S. dollar fell to a 1-year low against the euro. Top exporter Saudi Arabia said the economy was rebounding. Investors sold off the greenback on views that the U.S. Federal Reserve will signal plans to maintain loose monetary policy well into 2010. The weaker dollar makes commodities cheaper for buyers holding other currencies (since the Canadian dollar is appreciating - - - this is why the Canadian dollar is so highly correlated to oil prices). Oil prices rose $1.84 to settle at $71.55 a barrel, after falling $2.33 on Monday. Further support came as Saudi Arabian Oil Minister Ali al-Naimi said demand for the kingdom’s oil was increasing and that there were signs of economic growth. “The world economy seems to be recovering. I hope it will recover fast and therefore it will impact demand,” he told Reuters in an interview, adding he did not expect OPEC to cut output next year. Oil prices this year have found pricing support from signs of a global economic recovery that would bolster fuel demand. Crude dropped from record highs near $150 a barrel in July last year to below $33 a barrel as the recession battered oil consumption, prompting the Organization of the Petroleum Exporting Countries (OPEC) to agree to a series of output cuts to support prices.
The S&P/TSX composite index ended up 161.12 points or 1.41% with 7 of the 10 sectors ending higher.
In the United States the Fed started a 2-day meeting, and a decision on interest rates was expected this afternoon (unlikely to change). U.S. Treasury Secretary Timothy Geithner said that the U.S. economy appeared to be picking up steam and G20 leaders gathering in Pittsburgh this week will strive to ensure the recovery is balanced. “We are at the very beginnings of this recovery … We need to make sure that we keep at this, so we have in place a recovery that is going to be self-sustaining, led by private demand, (and) a financial system that can actually provide the credit that is needed.” G20 leaders will meet in Pittsburgh on September 24 & 25th and Geithner said “the aim was to take stock of the world economy and ensure better growth in the future.” “To make sure that as we recover from this crisis we are laying the seeds for a more balanced, more sustainable recovery. That is the agenda,” Geithner said. U.S. officials want the G20 to adopt a framework aimed at lifting growth in export-orientated members like China, Germany and Japan, while boosting savings and curbing consumption among import-hungry debtors like the United States (wow – I rarely make a sarcastic comment but….spend less then what you make? – the solution to all that ails the United States is that simple. I wonder if they can actually follow their own advice with a $1.8 trillion government deficit).
Stocks did rise as investors bet the U.S. Federal Reserve will stick to its accommodative policy to foster economic recovery, boosting growth-sensitive sectors such as financials, technology and industrials. With no change expected in interest rates, investors probably will focus on the Fed’s assessment of the economic outlook, particularly after Chairman Ben Bernanke said last week that the recession was “technically” over.
The Dow Jones industrial average gained 0.52%, the Standard & Poor’s 500 Index gained 0.66% and he Nasdaq Composite Index gained 0.39%. The S&P 500 has risen 58.4% since hitting a 12 year closing low on March 9th of this year. Conversely, the annualized rate of return for the S&P during the previous 12 years is still less than 5% per year of less than bonds.
As mentioned, the Federal Reserve will end its 2-day meeting this afternoon with a recognition that the U.S. economy is on the mend, but with no hint of a monetary policy shift. The Fed seems certain to hold benchmark interest rates near zero, and most economists do not see it raising them until the middle of next year at the earliest. Policy-makers, however, are widely expected to discuss ways to pull back their massive provisions of cash to the economy in a way that preserves the recovery, while preventing inflation (i.e. tools used by the Fed to get borrowing costs down and keep them down). Once the Fed rate is at zero then the Fed needs to use additional tools to get interest rates lower for consumers and business (i.e. become a buyer of credit products since more buyers equals higher prices and lower interest rates). A key question will be how soon and how rapidly the Fed should conclude its planned purchases of mortgage-related securities (to get consumer mortgage rates lowers since they are about 4.5% higher than the fed rate). It has said it will buy up to $1.25 trillion of mortgage-backed securities (10% of the market) and $200 billion of housing agency debt by the end of the year. After pressing interest rates close to zero in December, the Fed turned to asset purchases as a way to drive down mortgage costs and support the economy while increasing the ‘spread’ for the banks on their lending business so that they could recapitalize the banking system through higher profits.
Fed Chairman Ben Bernanke said recently that while the recession appears to be over, the recovery will be sluggish, suggesting the Fed will move cautiously in unwinding its programs to boost the economy. “Slack in the labor markets and diminished consumer demand should keep a lid on any near-term inflation pressures,” said Moody’s Economy.com economist Joseph Brusuelas.
I have mentioned previously that the cost of fixing the credit crisis would be high but not fixing it would be higher. In turn, as the economy stabilizes and starts to grow there will be opportunities. There is a little bit of a “wall of worry” right now since investors expect a pull back (only because things have gone up a lot but stock markets are forward looking), but the market just feels like it wants to go up. If there is going to be a very strong near-term global economic rebound greater than expectations, stocks will end the year higher. Stock market bulls say the 58% advance since March 9th can continue because the U.S. economy will emerge from the worst recession since the 1930s and grow 2.9% in the 3rd quarter, according to the median of 61 economists in a Bloomberg survey. A ‘feat’ that would have been considered unimaginable on the 9th of March when the consensus was a depression.
Things are looking up this morning but oil prices are down marginally.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
