The Canadian stock market index closed slightly higher yesterday as an uptick in gold prices helped push up gold shares. The gold sector was up 1.2%, the materials sector added 0.66% and the sector leader was health-care which gained 2.43%. There really was not a whole lot going on in Canada yesterday. The financial sector ended down 0.01%, dropping early in the day after Citigroup posted a massive loss as a result of taking charges linked to the repayment of government bailout funds. The news raised concerns about the quality of financial sector earnings as reporting season ramps up. We still have a long way to go in the U.S. economy.
The Toronto Stock Exchange’s S&P/TSX composite index finished up 0.11%.
Strong economic data and a Bank of Canada growth forecast suggested on Tuesday that Canada’s recovery from recession is on track, though soft private sector demand and an appreciating Canadian dollar (which makes our exporting market less competitive) were seen as risks. It will be another year before the Canadian economy can stand on its own feet without government assistance, the Bank of Canada said yesterday. The slightly pessimistic assessment came as the Canadian Central Bank signaled in no uncertain terms that it was in no hurry to move off historically low interests rates, saying they are still needed to stimulate borrowing and business expansion. It also revised downward its previous forecasts on growth for this year while raising it slightly for 2011. The key message governor Mark Carney sought to deliver was that both the Canadian and global economies may be improving, but that they are still primarily being propped up by massive government spending, and historically low interest rates, along with other measures.
“While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected (in October), the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems,” Carney said.
These comments will likely push the Canadian dollar down in the short-term which is what happened last time the Central Bank spoke. Don’t expect Canadian interest rates to change within the next 6-months and it will be very hard for the Bank of Canada to move ahead of the Fed in the United States without sending the Canadian dollar up in value by a significant margin. A higher Canadian dollar in the short-term will weaken our economic recovery.
In the United States stocks rose lifting the Dow and the S&P 500 to fresh 15-month closing highs as investors bet a potential Republican victory in Massachusetts’ Senate race could stall Obama’s reform agenda in the event of a Republican win (Obama is a Democratic). If a Republican wins then Obama would lose his super-majority in the Senate making it harder to approve or adopt certain policies.
Wall Street also got a boost from technology shares, which rallied in anticipation of strong earnings from bellwether International Business Machines (IBM). After the bell, IBM delivered quarterly earnings that beat Wall Street’s forecasts. IBM also raised its 2010 profit target and reported a stronger-than-expected 9% increase in 4th quarter earnings, as cost cuts and a shift to more profitable contracts helped it weather a slump in corporate spending. IBM’s share price fell 2% after the results (it was up 1.8% on the day), however, making clear that investors wanted even more from a company.
The company said it now expects profit of at least $11 a share in 2010 compared with its previous target of $10 to $11 per share.
Healthcare shares rallied the most on hopes that Capitol Hill in Washington would slow the healthcare overhaul, removing a threat to the profits of insurers and drug companies.
The Dow Jones industrial average jumped 1.09%, the Standard & Poor’s 500 Index shot up 1.25% and the Nasdaq Composite Index climbed 1.42%.
Citigroup Inc. rose 3.5% to $3.54 during the day after it reported a 4th quarter loss that narrowed from the previous year. The loss came on charges linked to repaying government funds. Citigroup posted a $7.6 billion quarterly loss but the bank’s shares rose as declining loan losses raised hopes that the worst might soon be over. The bank is still facing significant headwinds as loan losses could increase in the 1st quarter, and after that, the strength of the economy (housing prices) will be a key variable.
Tyco International agreed to buy Brink’s Home Security Holdings Inc., for $1.9 billion and Brink’s shares jumped 32.2%. Mergers & Acquisition (M&A) activity is picking up which is an encouraging sign.
This morning oil prices fell to below US$78 a barrel amid expectations of a dismal U.S. crude inventory report and fears of more lending curbs in China. A rise in inventories would suggest demand for oil remains weak. The Energy Department’s Energy Information Administration plans to announce its inventory report later today. Another negative is reports that China has ordered some banks to cease lending for the rest of January after exceeding credit limits. That raised fears China’s economic recovery and demand for crude could drop. Oil prices were held back after the Organization of Petroleum Exporting Countries (OPEC), which supplies roughly 35% of the world’s crude, kept its 2010 forecast of oil demand steady at 85.15 million barrels a day. OPEC said that oil inventories remain at high levels and are enough to handle any unexpected increase in demand.
European shares are down a little over ½ of 1% and North American futures. Bank of America (BofA) also posted earnings this morning slightly below expectations and its stock is under pressure in pre-market. U.S. equities will likely give back some of the gains posted yesterday but they are still up significantly from recent lows posted almost a year ago. This will be a long run to a full recovery but the worst appears to be over.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
