Canada’s main stock index finished higher for a 7th straight day yesterday, led by gold mining shares, which got a boost from better-than-expected results from Barrick Gold. Barrick, the world’s biggest gold miner, led all heavyweight gainers, up 3.3% after it announced plans to spin off its African assets into a new company and said its quarterly operating profit more than doubled on stronger gold prices. Gold producers have posted strong results this earnings season thanks in part to soaring bullion prices. Gold prices also ended higher after a choppy day in the wake of the International Monetary Fund’s announcement it would sell 191.3 tons of gold to the open market to boost resources for lending.
The Toronto Stock Exchange’s S&P/TSX composite index closed up 0.51% with 8 of the index’s 10 main sectors rising.
It is clear that investor sentiment has risen over the past couple of weeks but what is unclear is if that sentiment can be sustained. Currently about 75% of the companies within the S&P 500 index have released results so far that have beaten expectations.
In the United States stocks rose for a 3rd straight day as investors viewed company results and manufacturing data as evidence the economic rebound will continue. But stock index futures dropped steeply after the closing bell when the Federal Reserve announced it was raising the discount rate that it charges banks for emergency loans (the “discount rate” is the rate that the Fed sets for banks to borrow money and the “Fed funds rate” is the rate that the Fed sets for consumers or business which has not changed at this time). Investors have relied heavily on near-zero interest rates and have used cheap money to invest into riskier investments like equities and commodities that yield more returns. The Fed move, despite being a signal the economy is on the right track, marks a retreat from the easy money policy for banks.
During the trading day investors focused on positive news like the improved mid-Atlantic manufacturing data and setting aside a lackluster outlook from Wal-Mart Stores and a surprising increase in weekly jobless claims.
The Dow Jones industrial average rose 0.81%, the Standard & Poor’s 500 Index added 0.66% and the Nasdaq Composite Index gained 0.69%.
The number of U.S. workers filing new applications for unemployment insurance unexpectedly surged last week, while producer prices increased sharply in January, raising potential hurdles for the economy’s recovery. Initial claims for state jobless benefits increased 31,000 to 473,000, the U.S. Labor Department said. Another report from the department showed prices paid at the farm and factory gate rose a faster-than-expected 1.4% from December as higher gasoline prices and unusually cold temperatures helped boost energy costs. The rise in jobless insurance claims dealt a setback to hopes the economy was on the verge of job growth and could increase political pressure on President Barack Obama, who has made tackling unemployment his # 1 priority.
The U.S. economy or Gross Domestic Product (GDP) grew at a 5.7% annual rate in the 4th quarter, but still failed to ignite jobs growth. That shows GDP growth is artificially inflated by government stimulus and the inventory cycle rather than driven by final demand, which usually goes hand in hand with an improvement in the employment market. The U.S. economy has lost 8.4 million jobs since the recession started in December 2007.
Last night the Federal Reserve Board raised the discount rate charged to banks for direct loans by a ¼ of 1% to 0.75% and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs. “These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the central bank said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.” The U.S. dollar and the yield on U.S. Treasuries jumped as the Fed took another step in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed has provided hundreds of billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions such as American International Group (AIG).
The Fed Board said the outlook for policy remains “about as it was at the January meeting of the Federal Open Market Committee.” The central bank also cited last month’s statement, which said economic conditions are likely to warrant “exceptionally low” levels of the federal funds rate “for an extended period.” It was the 1st increase in the discount rate in more than 3 years.
Fed Chairman Ben S. Bernanke said investors should expect a “modest increase” in the discount rate “before long,” he also stated that the move should not be interpreted as a change in policy. Although, equity markets will view this as negative and will take this as an opportunity to sell short-term.
The Fed’s lending programs and their May 2009 review of the capital needs of the 19 largest banks helped restore confidence and liquidity in interbank lending markets. The TED spread, the difference between what the Treasury and banks pay to borrow dollars for 3 months, has narrowed to 0.15% point from as high as 4.64 % points in October 2008.
Prior to the financial crisis, the Fed kept the primary credit discount rate 1% above the target for the federal funds rate, now it is 0.50% higher.
This morning world markets fell after the U.S. Federal Reserve unexpectedly raised interest rates for emergency bank loans, triggering fears that regular borrowing costs could also move higher soon, slowing the recovery in the world’s largest economy. Growing optimism about the strength of the U.S. economy had helped boost the Dow Jones industrial average by 3% over the past 3 days. But the surprise Fed announcement after Wall Street trading closed left traders wondering whether the so-called “exit strategy” from a loose monetary policy could come faster than expected and stifle U.S. consumer demand.
This morning European markets are down by a nominal amount, commodity prices are down, the Canadian dollar is down and North American futures are down but considering the strong day the stock markets had yesterday they will likely still be up on the week.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
