The Canadian stock market closed flat on Friday as the banking sector fell after Bank of America (BoA) reported a quarterly loss, but gold-mining shares provided some offsetting advances. The weakness in some of the bank shares was a direct result of investors being disappointed over a bigger than expected loss at Bank of America, which was a setback for investors who had been encouraged by some strong U.S. corporate earnings earlier in the week.
The S&P/TSX composite index finished up ¼ of 1 point or flat. At one point the stock market did drop by more than 100 points or almost 1% but investors bought up shares and pushed the index back up. The main index finished the week up 0.6%, its 2nd weekly rise in a row. The economic outlook continues to be a key concern, and the Bank of Canada will give its views this week. Data on Friday showed Canadian consumer prices fell in September from a year earlier and while some of the details were mixed, the lack of inflation is likely to permit the central bank to hold the line on interest rates when it announces policy tomorrow. It will also allow it to repeat its conditional pledge that rates will stay unchanged at 0.25% through mid-2010.
Crude oil rose to a 1-year high above $78 a barrel on Friday after data showed U.S. industrial production expanded in September, boosting optimism for an economic recovery. Oil prices have jumped 12.9%, or nearly $9 a barrel, in 7 consecutive trading days. Increasing factory output increased optimism that industrial demand for fuel may rise. Government data showed Thursday a 5.2-million-barrel drawdown in gasoline stocks last week, the biggest decline in over a year.
In the United States stocks fell on Friday after disappointing results from General Electric (GE) and BofA demonstrated the road to economic recovery will be bumpy. GE, which sells products from aircraft engines to refrigerators, reported a 20% drop in revenue (remember we are looking for an increase in revenue and not a decrease), while BoA posted a $1 billion loss as both struggled with still weak business & consumer spending.
Friday’s corporate results contrasted sharply with those of JPMorgan and Intel earlier this week, which exceeded Wall Street forecasts and helped the Dow to close above 10,000 for 2 days straight. The Dow Jones industrial average fell 0.67%, the Standard & Poor’s 500 Index fell 0.81% and the Nasdaq Composite Index fell 0.76%. Analysts polled by Reuters said investors may have become too optimistic going into the earnings season, in contrast to the 2nd quarter when the bar was set low. The search for revenue growth has been a key theme after the last 2 quarters were characterized by cost cutting. But indexes gained for the 2nd straight week with the S&P 500 up 1.5%, the Dow up 1.3% and the Nasdaq up 0.8%. The Dow slipped below 10,000 after breaking the key barrier for the 1st time in a year earlier in the week.
Data showing weak consumer sentiment further pressured the market on Friday and overshadowed an earlier report that showed industrial production rose in September. The Reuters/University of Michigan Surveys of Consumers preliminary index of sentiment for October fell to a reading of 69.4 from September’s 73.5, below economists’ median expectation in a Reuters poll for a steady reading of 73.5. The market will continue to feel the push and pull as earnings season moves forward this week and investors react to individual corporate results. Major companies reporting this week include Apple, Texas Instruments, Caterpillar and Wells Fargo.
The U.S. budget deficit hit a record $1.4 trillion in the just-ended fiscal year, the government said on Friday, as the deep recession and a series of bank rescues cut a gaping hole in public finances. The total was $162 billion smaller than the White House had forecasted in August, but it still amounted to 10% of total U.S. economic output, the most for any budget shortfall since World War II. President Barack Obama has pledged to rein in high budget deficits by addressing long-term challenges like health care and energy costs in a fiscally responsible way. The deficit is more than 3 times as large as the $459 billion deficit posted in the prior fiscal year. Rescuing the economy and some of the country’s biggest banks from the worst recession since the Great Depression took a toll on U.S. finances, and the White House has forecast deficits of more than $1 trillion through fiscal 2011. “Future deficits are too high, and the president is committed to working with Congress to bring them down to a sustainable level as the economy recovers,” Treasury Secretary Timothy Geithner said in a statement.
The U.S. dollar has been falling on foreign exchange markets, suggesting a growing nervousness among some investors over the deficits. Geithner told CNBC television earlier on Friday that the United States must live within its means once economic growth is back on a sustainable path to preserve global confidence and keep the dollar strong.
Stocks could slip this week if earnings do not live up to heightened expectations, if this week’s results come in as hoped, sentiment might get a boost. The mood may also just be as cautious as after results from GE & BofA increased investor caution. According to Thomson Reuters data, 61 companies in the S&P 500 had reported 3rd quarter results by Friday and 79% of them beat Wall Street expectations.
This week will also feature the release of more economic data and U.S. Federal Reserve Ben Bernanke will speak today on Asia and the global financial crisis. In short, stocks move on news and there is a lot of news ‘hitting’ the market this week.
This morning things are looking up but a lot changes in the course of a day – expect a volatile week this week.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
