Index Daily Change
S&P/TSX composite index 0.04% Drop
Dow Jones industrial average 0.05% Gain
Standard & Poor’s 500 Index 0.17% Drop
Nasdaq Composite Index 0.06% Drop
Canada’s stock market ended slightly lower yesterday as energy stocks declined late in the day on global debt concerns, offsetting a rise in the financial sector. The stronger U.S. dollar pressured energy prices, pushing the energy sector down 0.5%. The U.S. greenback strengthened against the Euro after a draft agreement drawn up by the Euro zone showed that it and the International Monetary Fund (IMF) will share the burden of financial aid for debt-burdened Greece.
The heavily-weighted materials sector, home to mining stocks, also finished lower. The commodity sector has been hurt in the last couple of weeks due to the global economic concerns.
Earlier in the day, the index was up nearly 0.75% led by strength in financials.
In the United States stocks ended flat dropping off earlier highs as a weak U.S. bond auction and global debt concerns continued to weigh on investor sentiment. Indexes advanced for most of the day, with the Dow and S&P hitting fresh 18-month highs, but their gains mostly disappeared after the auction of 7-year U.S. treasury notes and comments from European Central Bank President Jean-Claude Trichet on issues surrounding Greece’s sovereign debt. Trichet told France’s public television that if the IMF or some other body exercises the responsibility in lieu of the Eurogroup or instead of governments, “it is evidently very, very bad.”
In short, the sovereign debt risk is going up and the appetite to buy sovereign debt (even from the United States) is going down. In turn, borrowing costs for governments will go up which will just push the cost of borrowing up for everyone else which reduces long-term growth.
The day’s early gains came after both Qualcomm and Best Buy gave bullish profit outlooks, an encouraging sign ahead of the upcoming earnings season. Bank of America (BAC) ended 1% higher while peer bank Citigroup (C), the most active stock on the New York Stock Exchange, ended up 2.9%. Earlier, Bloomberg News reported that the U.S. Treasury could unveil a plan next month for the sale of its stake in the bank.
Since the outlooks are obviously forward looking, they’re signs of encouraging things to come and it is reasonable to expect strong earnings. Within the 1st quarter S&P 500 earnings reports, due in the coming weeks, are forecast to show year-over-year gains of 36.6%, according to estimates compiled by Thomson Reuters. Also yesterday, data showed the number of U.S. workers filing new applications for unemployment insurance fell sharply last week.
A modest U.S. economic recovery still warrants the Federal Reserve’s ultra-low interest rate policy, but the central bank stands ready to remove stimulus once the expansion looks solid, Chairman Ben Bernanke said. Testifying before the U.S. House of Representatives Financial Services Committee, Bernanke offered a brief overview of the tools the Fed intends to use to reverse the emergency measures taken to grapple with the worst financial crisis since the Great Depression. “The economy continues to require the support of accommodative monetary policies,” Bernanke told lawmakers. “However, we have been working to ensure that we have the tools to reverse, at the appropriate time, the currently very high degree of monetary stimulus.”
In response to the crisis, the Fed slashed interest rates effectively to zero. It also embarked on an unprecedented asset purchase program totaling over $1.7 trillion by buying mortgage debt and Treasury bonds in an effort to push borrowing costs down even further. Bernanke argued these programs had helped to improve conditions in mortgage markets, which were at the center of a financial meltdown that began when falling home prices spurred a wave of defaults.
After the bell Euro zone leaders agreed to create a joint financial safety net with the IMF to help debt-ridden Greece and to try to restore confidence in their common currency after weeks of wrangling. Under the accord, Athens would receive coordinated bilateral loans from other countries that use the Euro and money from the International Monetary Fund (IMF) if it faced severe difficulties. “Europe has taken a big step in the face of a big challenge,” Greek Prime Minister George Papandreou.
The Euro did initial fall and then subsequently rebounded from a 10-month low against the dollar because investors took the initial view that IMF involvement suggested the 16-country euro zone was unable to handle its problems alone. Many details are unclear, such as how the Washington-based IMF and the euro zone would work together in a rescue. Some euro zone states, notably France, and ECB policymakers have previously opposed IMF involvement, saying such a move would underscore the single currency area’s inability to solve the deepest crisis in its 11-year existence on its own. Without a fallback mechanism, EU leaders fear Greece’s debt problems could spread to other countries in the euro zone including Portugal, Spain or Italy. In short, liquidity would freeze and we would have a debt crisis.
This morning European equities are down by a nominal about but Asia was up strong and so are commodity prices while U.S. stock futures are pointing up by about 0.20%.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
