Canadian stock markets rallied late in the day to end slightly higher yesterday as the financial sector pared initial losses as debt concerns weigh and a weaker U.S. dollar spurred mining shares higher. The financial and energy sectors finished down 0.59% and 0.55% respectively, with the declines in the energy sector attributable to a 2.6% drop in crude prices. The materials sector was the strongest sector, rebounding from the previous day’s losses to rise 1.8%, as investors focused on the weak U.S. dollar, rather than metals prices, which ended lower.
The index fell early in the day and was at one point down more than 120 points, hurt by concerns of further debt defaults after Standard & Poor’s cut its outlook on Spain to negative and warned of the risk of a debt downgrade. The S&P/TSX composite index rose 10.29 points, or 0.09%, to finish at 11,379.22. The index did hit a 1 week low of 11,248.92 which is about 400 points lower than the year high the index hit last week. The late day gains did snap a 4 day losing streak for the Canadian stock market.
There is some profit taking going on, some rebalancing and some risk reduction.
In the United States stocks ended higher as the U.S. dollar fell and investors’ appetite for risk returned, lifting shares of financial, technology and natural resource companies. Weakness in the U.S. dollar late in the day in combination with news that Citigroup is going to pay back their TARP assistance, both have given the stock market a little support. The Dow Jones industrial average ended up 0.50%, the Standard & Poor’s 500 Index ended up 0.36% and the Nasdaq Composite Index ended up 0.49%.
Treasury Secretary Timothy Geithner said the government would extend its $700 billion financial bailout fund to October 2010 for further efforts to fight home foreclosures and to ease credit for small businesses in the hopes of spurring job growth as the economy still faced “significant challenges.” Geithner, in letters to congressional leaders, pledged to deploy no more than $550 billion from the Troubled Asset Relief Program, allowing for some of the unspent funds to reduce budget deficits - $200 billion less then the original plan.
“This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats,” Geithner told House Speaker Nancy Pelosi. Timothy Geithner warned that withdrawing programs aimed at containing the crisis too early could prolong the economic downturn. “Too many American families, homeowners and small businesses still face severe financial pressure,” he said. “Further, the recovery of our financial system remains incomplete. And near-term shocks to that system could undermine the economic recovery we have seen to date.”
Citigroup plans to pay back the Treasury its rescue funds by raising money in a stock offering the repayment would be another sign that banks were returning to better health. Bank of America fully repaid the U.S. government the $45 billion in aid it took during the height of the financial crisis, the company said yesterday. BofA raised almost half the required funds via stock offering earlier in the week. Citigroup plans to pay back TARP by raising money in an equity offering as well that could be announced as early as today and could be some $20 billion. What makes the Citigroup issue different from BofA is that the U.S. government has a $30 billion stake in Citigroup and the U.S. government will have a ‘say’ in what goes on at Citigroup and the U.S. government will likely want to be a seller of those shares at anytime that Citigroup is doing a secondary offering. In short, Citigroup could likely raise $20 billion from new investors but $50 billion is likely another matter.
In short, the financial sector is much improved but it will still take 3 to 5 years before we see the end of any direct government involvement in all of the currently impacted banks. We should not have ‘credit crisis’ version 2 but it will be a long road to economic recovery in the United States when you review the state of the residential housing market and unemployment.
Stocks rose in Europe this morning on signs that central banks are confident enough in the strength of the economic recovery to remove stimulus measures. Standard & Poor’s 500 Stock Index climbed 0.4%. Commodities prices are also up.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
