The Canadian stock market drifted to a flat close yesterday as mixed economic news from the U.S. overshadowed the latest positive earnings reports. The S&P/TSX composite index slipped about ¼ of 1 point as investors were unsurprised by the Bank Canada’s decision to hold the line on interest rates at 0.25%.

However, the big news on the day was the fact that currency traders sent the Canadian dollar tumbling almost 2 cents US as the central bank strongly indicated a hike won’t happen until the middle of next year and delivered a clear warning of the damage being done to the economy by the surging Canadian dollar. In short the BoC does not need to raise interest rates to slow the economy down, the Canadian dollar is doing all the heavy lifting. The central bank cautioned that heightened volatility and the sharp rise in the Canadian dollar “are working to slow growth.”

It added that the country’s Gross Domestic Product (GDP) is still expected to grow by 3% next year, but only 3.3% in 2011, less than the Bank of Canada had forecast in July of this year.

Within the Canadian stock market we saw a rise in the telecom and materials sectors that was offset by weaker energy and gold sectors.

In the United States stocks retreated from 12-month highs as disappointing housing and inflation data prompted investors to book profits despite strong results from bellwethers including Apple and Caterpillar. New construction of U.S. homes rose less than expected in September and U.S. producer prices posted an unexpected decline, both pointing to a sluggish economic recovery.

After the closing bell, Yahoo, one of the largest sellers of online display advertising, said 3rd quarter profit more than tripled from a year ago, beating Wall Street’s estimates and sending its stock up 4.1% after hours. Investors are trying to absorb all the earnings news and see where the economy stands.

The blue-chip Dow Jones industrial average dropped 0.50%, the Standard & Poor’s 500 Index fell 0.62% and the Nasdaq Composite Index dropped 0.59%. In spite of recent declines, the stock market’s trend in the 3rd quarter has been mostly positive. U.S. stocks have risen steadily as S&P 500 companies have largely exceeded earnings expectations. With 95 of the benchmark S&P 500 companies having reported earnings, 79% have beaten expectations and only 11% have fallen behind, according to Thomson Reuters data. You are starting to see some companies top line and bottom line grow.

Headwinds are growing as softer-than-expected U.S. housing starts last month and a drop in prices paid for raw materials pointed to a slow economic recovery. This backed views that interest rates could stay low for a while in North America. A Commerce Department report showed groundbreaking for new homes rose 0.5% to an annual rate of 590,000 units in September, shy of forecasts for a 610,000 unit rate. Separately, the Labor Department said its producer price index, a gauge of prices received by farms, factories and refineries dropped 0.6% last month after rising 1.7% in August. Analysts had expected prices to hold steady.

San Francisco Fed President Janet Yellen said she did not anticipate the U.S. central bank would withdraw its support to the economy any time soon and added that economic conditions would be the main deciding factor. The economy is expected to have started growing again in the July-September period after a downturn that began at the end of 2007.

This morning things are pointing down but the fundamentals are starting to show signs of improvement and a sustainable economic recovery although, this is and will be the worst recession since the Great Depression.

Regards,

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

SVP & Partner