Canada’s main stock market ended lower in a volatile day yesterday as gold miners dropped on sliding bullion prices and investors worried over Germany’s surprise crackdown on some speculative trading. Gold mining shares led the decline as bullion prices skidded below $1,200 an ounce.
The TSX index was also dragged lower as investors fretted that Germany’s ban on some riskier short-selling bets foreshadowed tighter financial regulation in other countries. Germany banned “naked” short sales of Euro-denominated government bonds, credit default swaps based on those bonds and shares of the country’s 10 leading financial institutions, in a move that appeared to catch its partners in the European Union off guard.
Gold has sold off because investors feel that Europe is less likely to see a mass exodus of money because of this ban on shorting and invest in gold (for example). The Toronto Stock Exchange’s S&P/TSX composite index finished the day down 0.84%. The index was briefly higher at the start of the day, but quickly dropped more than 2% to its lowest level since the market meltdown on May 6th. The index has dropped 4.3% in the past week.
Additional pressure came on news of an unexpected fall in April U.S. consumer prices, the first decline in a year. On the upside, financials shares climbed 0.2% the sector managed to limit losses ahead of earnings results next week and because the sector’s big banks are seen as comparatively safe.
In the United States stocks fell as Germany’s unilateral action to ban specific trades on some stocks and bonds sparked a fresh wave of uncertainty and risk aversion among anxious investors. Markets already fear the Euro zone’s credit woes could cut into economic growth, and Germany’s move late on Tuesday triggered selling of industrial shares, as they have heavy exposure to Europe.
It is becoming increasingly clear that these are still separate countries with their own political agendas. But not all the news was bad, as the broad S&P 500 bounced off technical support, setting a floor under its recent drop. The Dow Jones industrial average declined by 0.63%, the Standard & Poor’s 500 Index dropped by 0.51% and the Nasdaq Composite Index dropped by 0.82%. The S&P 500 briefly fell below its 200-day moving average, a key technical long-term momentum indicator. But its rebound off that level reinforced it as support going forward.
Stock indexes barely budged after the Federal Reserve gave an upbeat outlook of the U.S. economy in the minutes of the most recent meeting of its policy-setting committee. Data showed the U.S. Consumer Price Index fell for the first time in a year last month and the closely watched core inflation rate eked out its smallest annual gain since 1966, further supporting the Fed’s vow to keep interest rates low for some time.
The Federal Reserve raised its forecasts for economic growth and debated eventually selling mortgage debt, according to minutes of an April meeting that offered no hints of imminent changes in monetary policy. The Fed, in response to the worst financial crisis since the Great Depression, has bought more than $1.4 trillion in mortgage debt, an unusual step that has stoked fears of future inflation. Fed officials agreed at their April 27-28 meeting that such holdings could boost inflation expectations and would eventually have to be sold, but not anytime soon.
The report reflected the U.S. central bank’s thinking before a worsening of the European debt crisis, which has taken a toll on U.S. financial markets and prompted a reopening of a key emergency lending agreement with other central banks. Its quarterly “central tendency” forecasts showed considerably greater optimism among policy-makers, who predicted gross domestic product growth would come in around 3.2% to 3.7% this year. In January, officials thought the U.S. economy would grow between 2.8% and 3.5%.
This morning stocks slid for a 6th day and U.S. index futures declined as the Euro weakened against the dollar (we might see an advance on the Nasdaq as after the closing bell yesterday). Applied Materials, the world’s largest producer of chip making gear, posted a 2nd quarter profit as customers added capacity to take advantage of growing demand for consumer electronics, especially in emerging markets. Oil fell again to below $68.
The MSCI World Index of 23 developed nations’ stocks fell 0.5% for its longest losing streak in 4 months. The futures on the Standard & Poor’s 500 Index retreated 0.6%. The euro weakened against the dollar, trading near the lowest level in 4 years.
European finance officials meet in Brussels a day before the German parliament votes on the country’s share of a $1 trillion bailout to backstop the Euro in the wake of a worsening sovereign debt crisis. Stocks plunged yesterday as Chancellor Angela Merkel’s unilateral effort to control what she called “destructive” markets rattled investors. The German ban on some bearish bets against financial companies and government bonds wasn’t replicated in other European states.
In order for the Euro zone to start making some serious progress you need to see some serious austerity.
As Euro stocks declined yesterday and left the Euro benchmark gauge trading at less than 15 times its companies’ reported earnings, near the lowest level since December 2008. The recent slide has dragged the S&P 500 index 8.4% lower from its 2010 closing high on April 23rd and pushed the benchmark index into negative territory for the year. The Euro issues have diverted attention from a solid quarter of corporate results in the United States. In short, right now, obviously the good corporate news is not having much of an effect on the market. It is all about the technical aspect at this time, and the strengthening of the U.S. dollar, which has cut investors appetite for risk.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
