Canada’s main stock index closed lower yesterday, halting an 8-day winning streak, dragged down by weakness in the resources and financials sectors. Gold stocks were also among the falling sectors as the price of gold bullion retreated from 1-month highs. Although energy shares were also lower and despite oil prices that edged above $80 a barrel, a French refiner strike and tensions over Iran’s nuclear program outweighed gains in the U.S. dollar.
The S&P/TSX composite index declined by 0.64% on the day with 6 out of the 10 main sectors declining. The 8-day rally had pushed the index almost 5% higher. Some profit-taking was to be expected in the short-term but gains were justified based on an overall improvement in the economy and good corporate results. Investors are still assessing the implications of the Federal Reserve’s move to hike its discount rate (rate charged from the Fed to the banks) last week, which raised speculation that the U.S. central bank might raise its key fed funds rate (charge to business and consumers) rate earlier than expected. Greece’s unresolved debt woes also remained on investors’ watch list.
Canadian banking earnings will “kick off’” this Thursday with Canadian Imperial Bank of Commerce (CIBC) followed by the other major banks thereafter. Having weathered the global financial crisis better than most lenders, Canada’s big banks are expected to report unimpressive profits in their 1st quarter, due to the lingering effects of the recession.
In the United States stocks finished flat as investors held back before congressional testimony by Fed Chairman Ben Bernanke. President Barack Obama revised plans for an overhaul of U.S. healthcare. Financial shares benefited from the focus shifting away from reform in that sector to health care. Investors bet that the White House’s bid to resuscitate the stalled healthcare overhaul would take some of the intense regulatory scrutiny off the banks. The Democrats are going to spend so much “political capital” trying to get healthcare through that they might not necessarily have that “capital” to get any major financial reform through. The KBW bank index rose 1.9% but energy shares weighed on the broader market.
Investors are hoping Fed Chairman Ben Bernanke clarifies the Fed’s thinking behind last week’s surprising hike in the discount rate that begins the removal of the extraordinary liquidity that has propped up markets. Investors are trying to discern if the increase in the discount rate was simply a “technical rebalancing” or “normalization” or is it going to be something that’s indicative of monetary policy down the road (i.e. higher rates sooner versus later)?
The Dow Jones industrial average dropped 0.18%, the Standard & Poor’s 500 Index dropped 0.10% and the Nasdaq Composite Index fell 0.08%.
This week, Wall Street will stay focused on the Federal Reserve chairman. Bernanke is scheduled to testify on monetary policy and the economy before House and Senate committees on Wednesday and Thursday.
This morning Europe is experiencing some headwinds, especially Germany, after a closely watched survey reinforced market fears that the recovery from recession in Europe’s biggest economy remains subdued. The Ifo Institute reported that its business climate index for Germany fell to 95.2 in February which is below its long-run average of 95.8 the previous month. The fall, which was the 1st in nearly a year, comes in the wake of similarly pessimistic reports and provides mounting evidence that the recovery in the 16 country Eurozone has been hit by the debt crisis that is afflicting Greece and is threatening to spill over into other countries, such as Spain and Portugal.
North American futures are also pointing down and commodity prices have also declined this morning. In general governments around the world will come to the realization that they need to prudently constrain their stimulus spending and implement a realistic plan to balance their respective budgets in the mid-term.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
