The Canadian stock market fell hard yesterday but did recoup some of those losses at the end of the day. The materials & energy sectors took the biggest hit as commodity prices fell on fresh evidence of tightening credit in China. Investors are concerned about a drop in demand as credit tightens in China. Although, oil and metal prices were also pushed down by a stronger U.S. dollar, which hit a 5-month high against the euro. A higher U.S. dollar (also know as a greenback) makes commodities, which are most frequently priced in U.S. dollars, more expensive, thereby reducing demand.
China is reducing financial stimulus or access to cash in an attempt to reduce demand and in turn inflation. Investors are counting on emerging economies like China to underpin the global recovery story, so any restrictive policy there could lead to a setback for bull investors. China’s growth rate accelerated to the fastest pace since 2007 in the 4th quarter, signaling a need to rein in credit growth that in turn threatens to destabilize the world’s fastest growing major economy. Gross domestic product (GDP) rose 10.7% from the same period a year ago. Oil slipped below $78 a barrel. The financial sector was down 0.88% after quarterly results from 3 large U.S. banks increased uneasiness about the health of the financial services industry in that country.
The Toronto Stock Exchange’s S&P/TSX composite index was off the lows of the day, coming back from a 182-point drop to finish down 84.1 points at 11,679.32 which translates into a drop of 0.73%.
In the United States the Dow suffered its worst drop of 2010. U.S. stocks dropped as investors fear China’s curb on bank lending might jeopardize the global economic recovery, while IBM’s outlook sparked caution about the technology sector. Although IBM posted a stronger-than-expected quarterly profit late on Tuesday, investors did not appreciate its guarded 2010 outlook.
The Dow Jones industrial average dropped 1.14%, the Standard & Poor’s 500 Index dropped 1.06% and the Nasdaq Composite Index dropped 1.26%. The Dow suffered its largest daily percentage decline since late December, while the Nasdaq took its largest daily percentage loss in a week. On Tuesday, the Dow and the S&P 500 ended at 15-month highs on bets the Democrats would lose a Senate seat (and eventually they did). Earlier in the day, the major indexes had dropped about 2% or more, but recovered some ground in the last hour of trading in the day.
The latest earnings season picked up pace after the bell, when e-commerce company eBay Inc. and coffee chain Starbucks posted stronger-than-expected quarterly earnings. Both shares jumped in after-hours trading.
On a busy earnings day for U.S. banks, Wells Fargo & Co. and U.S. Bancorp reported better-than-forecast quarterly earnings, helped by recent acquisitions, while a larger rival, Bank of America, got a boost from Merrill Lynch. Bank of America, the top U.S. bank by assets, reported a wider-than-expected loss, but said its credit problems were beginning to stabilize. Investors discounted some of the problems and focused on banks’ improving credit quality, and shares of many major banks outperformed the broader market as U.S. Bancorp shares rose and Bank of America also gained on the day. The KBW bank index rose 1.4%.
U.S. housing starts unexpectedly fell last month as unusually cold weather hampered construction, but a jump in building permits to a 14-month high indicated the housing market recovery was intact. The U.S. Commerce Department said construction of new housing fell 4% in December to a seasonally adjusted annual rate of 557,000 units as construction of single-family homes slipped. However, building permits which provide a sense of future home construction jumped 10.9% to 653,000 units last month, the highest level since October 2008 and above market expectations for 590,000 units. Data such as pending home sales and homebuilder sentiment have hinted at potential weakness in the sector. There is still reason to be cautious because in the middle of this year the homebuyer tax credit will expire and mortgage rates will probably rise in the United States.
A recovery in the housing market, whose collapse triggered the most brutal U.S. recession since the Great Depression of the 1930s, is considered key to a healing of the U.S. economy. A separate report from the U.S. Labor Department showed producer prices rose 0.2% (inflation) in December as food prices surged, and recorded their largest year-on-year gain in 14 months. Core prices, which exclude food and energy, were unchanged on the month and up just 0.9% on the year, showing inflation pressures remained tame.
The Bank of Canada received more reason to keep interest rates at record lows yesterday as inflation data indicates the slack economy will keep prices in check throughout the year. Statistics Canada said the annual inflation rate rose to 1.3% in December 3/10th of 1% less then than expectations. Core inflation, which excludes the volatile energy component, remained at 1.5% and well below the central bank’s target of 2%. News of the surprisingly low inflation reading sent the Canadian dollar already under pressure from falling commodity prices, down more. At one point the loonie was down 1.68 cents at 95.34 cents US, before recovering slightly to finish down 1.51 cents at 95.51 cents US on the day. Moderate to low inflation prospects going forward relieves central bank governor Mark Carney of any urgency to abandon his near-zero policy rate any time soon.
Today, Carney, who will hold a news conference after releasing a detailed analysis of the bank’s view on the economy, has stated that he is committed to maintaining the policy overnight rate at 0.25% until after June. Given the excess capacity in the economy, some economists now see Carney holding steady on rates until the 4th quarter of this year.
This morning oil prices regained some of yesterday’s losses and are currently trading near US$78 a barrel after China, a top oil consumer, declared it has recovered from the global crisis, relieving some concerns over its recent “crackdown” on bank lending. European shares are up this morning and North American futures are also pointing slightly higher.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
