Canada’s main stock market edged higher on Friday for the 8th straight day, as gains in energy and financial sectors outweighed a drop among gold miners. Investors are concerned that a strike at French refineries along with geopolitical tensions over Iran’s nuclear situation could lead to supply worries, which pushed the price of U.S. crude oil futures higher for the 4th day in a row.
Financial shares were mainly higher as investors feel that banks will benefit from the stronger Canadian economy. Investors were a little cautious as they digested an unexpected hike in the U.S. Federal Reserve’s discount rate, which is the rate at which the U.S. central bank lends to banks. The move suggested that the Fed was close to raising its fed funds rate, its main policy rate (what consumers and business pay to borrow money), despite assurances from Fed policymakers to the contrary.
The Toronto Stock Exchange’s S&P/TSX composite index ended up 0.12% with 8 out of the index’s 10 main sectors higher, with the energy and financial groups both up 0.3%. For the week, the index gained 2.1%.
In the United States stocks rose on Friday as investors took the Federal Reserve’s discount rate increase as evidence the financial system is healing but worried the eventual withdrawal of easy money will hurt Wall Street. Even as stocks closed out their best week of the year, investors were not convinced by the Fed’s reassurance that its benchmark rate will remain near zero for an extended period of time.
Investors know the Fed is going to hike. The question is if that hike be soon or is still a long way away? The president of the New York Fed, William Dudley, said the central bank’s pledge to keep benchmark borrowing costs low for an extended period of time “is still very much in place.” Three Fed officials on Thursday evening also stressed the move did not represent a tightening of monetary policy. The dollar jumped, Treasury bond prices fell and stock futures slipped immediately after the discount rate hike as investors bet the change could signal a speeding up of the Fed’s retreat from emergency measures to support the economy.
Stocks initially fell further on Friday but closed marginally higher as investors saw the rate hike as a sign of strength in the economy. In short, this is actually a good thing and not a bad thing.
The Dow Jones industrial average gained 0.09%, the Standard & Poor’s 500 Index rose 0.22% and the Nasdaq Composite Index edged up 0.10%. The Dow ended the week 3% higher and the S&P 500 3.1% higher, the best performance for the two gauges since late November. The Nasdaq rose 2.8%, its best weekly showing since late December.
The latest U.S. inflation data, which showed consumer prices rose less than expected in January, seemed to support the view the Fed was not facing urgent pressure to raise its benchmark fed funds rate, which stands near zero and has helped fuel a broad advance in stocks. Consumer prices edged higher in January, while prices excluding food and energy fell for the 1st time in 27 years, supporting the Federal Reserve’s contention it would keep its benchmark interest rate low for an “extended period.” The tame inflation data on Friday helped calm fears that the Fed’s decision to raise the discount rate it charges on emergency loans to banks is not going to change their ability to keep rates exceptionally low for an extended period of time.
A record proportion of U.S. mortgages were in foreclosure or at least one payment past due in the 4th quarter, according to industry data showing the fragile state of the recovery in the U.S. housing market. The Mortgage Bankers Association said on Friday the combination of loans in foreclosure and one payment in arrears was 15.02 % on a non-seasonally adjusted basis, the highest ever in the survey. However, economists are stating that things appear to be bottoming out but that it is still a big problem.
This morning global shares are up as U.S. consumer prices rose less than expected, easing concern the Federal Reserve will increase interest rates further, and commodity prices climbed. BHP Billiton Ltd., Australia’s top oil producer and the world’s largest mining company, gained after metal prices rose. As mentioned the stock market will take back last week’s late week losses as concerns over the Fed rate increase ease. European stock markets were little changed, although ongoing worries about the debt crisis afflicting Greece kept investors in check. The focus for investors this week will likely be Bernanke’s testimony on Wednesday and Thursday. In particular, investors will be interested to hear what Bernanke says about last week’s decision by the Fed to raise its discount rate by 0.25% to 0.75%. A whole list of Fed officials lined up to reassure investors that the decision was by no means a precursor to a marked tightening in policy.
There is a growing optimism that the recovery, at least in the U.S., is on a sure footing and that has helped stock markets. In addition, good stock earnings and some good Mergers & Acquisition activity will also help.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
