Canada’s main stock market was little changed yesterday as shares of big fertilizer makers Potash and Agrium rose on broker upgrades while gold miners followed bullion prices lower. Energy shares also fell alongside weaker oil prices, dragging energy stocks lower was a 2% slide in oil prices to below $74 a barrel. Oil and product inventories rose in the United States as the economic downturn has depressed demand.
Despite the good jobs numbers, crude prices have some significant drags on it as supplies increase, refinery utilization drops and overall economic activity contracts. On Friday, data showing that U.S. jobs fell much less than expected had boosted hopes for economic recovery, but on Monday U.S. Federal Reserve Chairman Ben Bernanke warned that the unemployment rate could remain elevated for some time.
Oil markets have looked to macroeconomic factors this year for signs of a recovery from the recession that could support oil demand. Saudi Arabia’s oil minister Ali al-Naimi on Saturday described the current oil price as stable and “perfect” for consuming and producing nations alike at around $75 a barrel. With no output changes expected at OPEC’s Luanda meeting later this month, lots of inventory or crude oil stored on land and an estimated 165 million barrels of crude oil in floating storage, investors have been sent further out along the oil futures curve in search of trading profits (since investors do not expect a major short-term change in oil prices).
Minor advances or declines could become commonplace until Christmas as investors opt to hang onto profits. The S&P/TSX composite index closed down 0.18%, the 3rd straight lower close after rallying last week to its highest level in more than 14 months.
In the United States the S&P 500 and Nasdaq ended slightly lower on Monday and the Dow was flat, reversing earlier gains, after comments by Federal Reserve Chairman Ben Bernanke sparked jitters about the economic recovery. Financial and technology shares were among the biggest drags on the market. The S&P Financial Index lost 1.6%. The Dow Jones industrial average ended up 0.01%, the Standard & Poor’s 500 Index dropped 0.25% and the Nasdaq Composite Index dropped 0.22%.
Recently investors had been looking for a clue as to how the Fed might unwind its economic stimulus efforts after a report on Friday showed employers cut far fewer jobs than expected in November. In short, investors thought interest rates would go up sooner versus later but are now concluding that will likely not be the case as the Fed will likely keep interest rates at record lows until there are signs of inflation versus a bottoming out of the employment market.
The central bank is sticking to its pledge to hold benchmark borrowing costs at exceptionally low levels for an “extended period.” Fed chairman Ben Bernanke said inflation could remain subdued, but the U.S. unemployment rate could remain elevated for some time. Bernanke also said the U.S. economy faces “formidable headwinds,” including a weak employment market and tight credit conditions that have persisted despite the Fed’s efforts to support the economy. “We still have some ways to go before we can be assured that the recovery will be self-sustaining, also at issue is whether the recovery will create the large number of jobs that will be needed to materially bring down the unemployment rate.”
While underscoring the recovery’s fragility, Bernanke argued that worries about the Fed’s easy money policies are setting the stage for runaway inflation later have been unfounded. “The Federal Reserve is committed to keeping inflation low and will be able to do so” Bernanke said. Although the Fed will continue to monitor inflation closely, it appears likely to remain subdued for some time and could in fact move lower.
Financials were hit as there are still a lot of questions as to how Trouble Asset Relieve Program (TARP) recipient banks are going to pay back their loans, further compounded by the fact that Bank of America is paying back their loans and similar companies (like Citigroup) must also disclose their plan. In addition, the Treasury department did highlight that they expect the TARP cost to be about $200 billion less then initially estimated.
Stocks, gold and oil fell, bonds and the U.S. dollar advanced as credit-rating companies highlighted the risk of government deficits and German industrial production unexpectedly dropped. Futures on the S&P 500 dropped 0.8%, reversing a 0.3% advance spurred by FedEx beating their profit estimate. The benchmark for U.S. equities has jumped 63% since March 9th, the steepest advance since the Great Depression, spurred by record-low interest rates and $12 trillion committed by governments worldwide. The measure is valued at 22.2 times the reported operating earnings at its companies from the past year (last 12 months versus next 12 months or going forward looking earnings), the most expensive level since 2002, according to data compiled by Bloomberg. Stock markets are also facing some headwinds this morning based on comments made by Ben Bernanke yesterday (highlighted above).
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
