Canada’s stock market ended sharply lower in volatile day yesterday, after worse than expected global manufacturing data raised concerns about the pace of the global economic recovery, hurting oil prices and energy shares. Energy shares sank 3.3%. Data showed manufacturing growth slowed in the Euro zone and China, but there was some relief in the United States, where there was some evidence of some sluggish improvements.

Investors are nervous about global growth and all the head-winds.

The Toronto Stock Exchange’s S&P/TSX composite index ended 191.02 points, or 1.62%, lower at 11,571.97. The index swung between positive and negative for much of the day. Recently, stock markets have endured a bout of nervousness in the last hour of trading and the market seems to have given up the gains of the day and noise dive. It does not help that there are some new political tensions in the Middle East between Israel and Turkey.

The Bank of Canada raised its key interest rate; the 1st in the G7 industrialized economies to do so after the global recession, but said the European debt crisis made its next move highly unpredictable. The rate hike, to 0.5% from 0.25%, is a response to 2 quarters of extraordinarily strong growth in Canada. However, the bank cautioned investors against betting on an uninterrupted tightening campaign, due to the Euro zone fiscal problems and an uneven global recovery. “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the central bank said.

The rate hike itself was widely expected. In a Reuters poll of 40 analysts, 32 had forecast a ¼ point rate hike. No surprise in the decision but the tone was slightly more dovish than the markets had anticipated. We have been stating all along that interest rates will remain lower for longer than people anticipate (look at Japan). We are not suggesting that rates will not increase but we are suggesting that in the medium to long-term (next 3 to 5 years) less than what investors anticipate (especially in the United States).

The Bank of Canada has broken ranks with the U.S. Federal Reserve in the past, but generally the two policy rates move in tandem. But the U.S. Federal Reserve continues to promise to hold its rate ultra low for an extended period, depending on economic conditions. The European Central Bank, which has cut rates to 1.0 percent, is far from considering its exit strategy as it takes extraordinary steps to ease the debt crisis and prevent it from snuffing out a recovery on the continent.

Canada’s economy fell into mild recession last year, but its banks emerged unscathed from the credit crisis and jobless rates did not soar as high as in the United States. Consumer spending and a hot housing market have fueled a faster than expected recovery since then. The economy grew at a surprising 6.1% annual clip in the 1st quarter, and by 4.9% in the 4th quarter of 2009. It said the global recovery is “increasingly uneven,” with emerging markets taking the lead while there is a “possibility of renewed weakness in Europe.” The debt crisis in Greece and some other European countries has so far had only a limited impact on Canada through lower commodity prices and tighter financing conditions. However, some countries will now have to cut spending quickly (don’t want to be the next PIGS country, Portugal, Italy, Greece or Spain) and that, combined with debt reduction by banks and households, could slow global growth. That could hurt Canada’s export-dependent economy.

In the United States stocks fell as energy shares slid after the latest failed attempt to halt the oil spill in the Gulf of Mexico and the U.S. government announced a criminal probe into the disaster. Investors punished shares of companies directly involved with the spill and losses accelerated into the close following the news of the investigation. There is so much uncertainty; investors are stepping to the sidelines. U.S.-listed shares of BP which owns the well, tumbled 15% and has now lost about $75.03 billion since the April 20th rig explosion, and the stock has the lowest price-to-earnings ratio of any of the major oil companies as a result of the fall The losses signaled growing frustration over the difficulty of sealing off the worst oil spill in U.S. history.

The Dow Jones industrial average declined by 1.11% to 10,024.02, the Standard & Poor’s 500 Index fell 1.72% and the Nasdaq Composite Index fell 1.54%.

This morning stocks declined in Europe (a little catch up from yesterday), led by energy companies. U.S. futures fluctuated before a report that may show the number of contracts to purchase previously owned homes rose in April for a 3rd consecutive month as buyers rushed to lock in a government tax credit. The index of pending-home purchases climbed 5% following a 5.3% gain a month earlier, according to the median forecast in a Bloomberg News survey of 40 economists. The National Association of Realtors report is due at 10 a.m. in Washington.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner