Index Daily Change
S&P/TSX composite index 0.38% Drop
Dow Jones industrial average 0.66% Drop
Standard & Poor’s 500 Index 0.59% Drop
Nasdaq Composite Index 0.23% Drop
Canada’s main stock market ended lower for a 2nd straight day yesterday, pulled down in a broad sell-off that was led by the energy sector, while firm gold prices offset a portion the overall losses. Within the index, 9 of 10 main sectors were lower, with the oil and gas group the top laggard, down 1.47%. The price of crude oil, an important Canadian export, broke a 6-day winning streak to settle below $86 a barrel, prompting profit-taking.
The market has advanced a considerable amount and will experience pause. Investors may also have been measuring the impact of a firmer Canadian dollar, which touched parity with the U.S. dollar for the 2nd time this week before slipping again. After a weak start to the year, the stock market has steadily gained on a combination of better economic conditions in Canada and higher commodity prices.
Meanwhile, data showed recovery was taking a tighter grip as purchasing activity jumped more than expected in March and building intentions were near a 2007 peak despite cooling slightly in February.
On the upside, gold miners were supported by the price of the precious metal, which rose above $1,150 an ounce, its highest level in nearly 3 months. This helped boost the materials sector 1.52%, the index’s lone rising sector.
In the United States U.S. stocks fell in a broad late-day drop after a top Federal Reserve official said interest rates should not stay low for much longer, giving investors an excuse to take profits. Thomas Hoenig drove afternoon selling after he said keeping interest rates too low for too long would encourage risky financial behaviour.
The Federal Reserve’s near-zero interest-rate policy has underpinned a rally of almost 75% since the March 9, 2009 low, and the removal of easy money is one of the market’s biggest fears. Hoenig, the sole dissenter at the most recent Fed meeting, advocated higher rates.
In contrast, Federal Reserve Chairman Ben Bernanke said the U.S. economy still faces significant headwinds, suggesting he was in no rush to raise interest rates. In a speech that suggested the central bank chief was in no rush to begin raising interest rates, Bernanke outlined a number of challenges to the country’s growth outlook. “Many Americans are still grappling with unemployment or foreclosure, or both,” Bernanke said. “We are far from being out of the woods. In particular, Bernanke highlighted continuing weakness in housing as a danger to the recovery, which he nonetheless said would be sustainable enough to bring down the unemployment rate slowly over time. “We have yet to see evidence of a sustained recovery in the housing market,” he said.
Against that backdrop, the Fed chairman saw no immediate reason to be worried about inflation, which he characterized as “well controlled.”
Some investors are betting the central bank could begin tightening policy in the second half of this year. Others believe lingering economic fragility will keep the Fed on hold until at least 2011.
This morning global equity market dropped amid mounting worries about a potential Greek debt default as the country’s borrowing costs continue to go up. In Europe shares are down around 1%. Wall Street was also poised to open lower after sizable drops yesterday in the wake of disappointing data showing that consumer credit in the U.S. fell by $11.5 billion in February. Dow futures were down 0.4% while the broader Standard & Poor’s 500 futures fell 0.5%.
However, the main point of interest in the markets this morning ahead of the European Central Bank rate decision, is what is going on with Greek borrowing costs in the money markets. Greece has returned to the forefront of investors’ concerns this week, barely 2 weeks after the EU finally agreed to a backstop bailout mechanism for the debt-laden country that would also involve the International Monetary Fund (IMF). With or without support from the EU or the IMF the bottom line remains that after years of fiscal mismanagement investors have little confidence that Greece can implement the necessary austerity measures and slash its budget deficit. Investors continue to demand a growing risk premium to hold Greek debt and the government cannot afford to issue debt at these interest levels and simultaneously meet its deficit cutting targets
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
