Markets take another wild ride
Hike in trade deficit, oil price fall leads to swings in stock markets
Canada’s main stock index lurched wildly Tuesday before settling little changed, while U.S. benchmarks moved from negative to solidly positive territory as investors weighed improving economic fundamentals against the risk of mounting inflation.
A surprise jump in Canada’s’ trade deficit to $3.2 billion in December as imports increased ahead of exports at 1.5 per cent to a record $49.7 billion, along with weakness in oil prices and a report showing a drop in Toronto region house sales in January, contributed to the midday decline for the S&P/TSX composite index, said Craig Fehr, Canadian investment strategist at Edward Jones.
He suggested the “confluence of events” was also impacted by the dramatic moves in U.S. equities, with Canadian and U.S. markets intertwined along with the two nation’s economies
In Toronto, the S&P/TSX plunged, recovered slightly at 107 points down to 15,227.79, in late morning and then rose to 15,363.93 by close for a change of 0.19 per cent.
The Canadian dollar was trading at 79.79 cents (U.S.). The loonie has slipped 1.27 cents (U.S.) since Friday as jittery investors seek the U.S. greenback as a safe haven in times of distress.
The Dow was up 567.02 points, or 2.33 per cent, to 24,404.
The Standard & Poor’s 500 index, a broader market, was up 46.4, or 1.74 per cent, to 2.695. The Nasdaq composite was up to 7,115.88.
While many market observers say a correction was expected after a decade-long bull run, the trigger that sparked the sudden downturn that hit markets on Monday is thought to be U.S. figures released Friday that suggested long-anticipated wage growth has started to kick in, resulting in inflation and a greater potential for the U.S. Federal Reserve to raise interest rates.
An increase in interest rates pushes bond yields higher and makes such fixedincome investments more attractive, and bets on corporate earnings and dividends less attractive.
The Toronto Stock Exchange has experienced a longer seven-day decline, but drops have not been as steep as those in U.S. markets.
The Toronto exchange ended last week down 4 per cent before closing down another 1.7 per cent Monday amid downward pressure on markets around the world.
While the TSX has seen a more gradual decline than what was seen on U.S. markets, the continued selloff is an indication that after a long period of market stability, investors are getting re-acquainted with volatility, says Kash Pashootan, CEO and chief investment officer at First Avenue Investment Counsel Inc. in Toronto.
“Monday was the first taste of meaningful volatility that we’ve had in over six years, and so investors were trying to figure out what to do and how to handle it,” Pashootan said.
Fehr said the U.S sell-off of more than 660 points Friday and a record 1,175 points Monday was “a bit of an overreaction,” suggesting that investors are struggling to adjust to the removal of federal stimulus from the U.S. economy against a backdrop of improving corporate earnings and expanding employment.
He called stimulus from U.S. tax reform a “very small contributing factor” to what many investors see as the likelihood that inflation in the U.S. will exceed the Fed’s target range sooner rather than later. He also suggested that the wage pressures revealed in Friday’s U.S. employment data “does not a trend make.”
The Republican plan to cut the corporate tax rate from 35 per cent to 20 per cent is expected to save companies billions of dollars, but market experts worry that it could drive up business borrowing rates, as govern- ment crowds out of the private sector in the bond market to make debt issues more costly.
With the U.S. posting solid GDP growth on increasing consumer spending and with unemployment there at a 16-year low, fiscal stimulus in the form of the corporate tax cut could fuel a bubble in the stock market, David Kelly, chief global strategist at JPMorgan Funds, wrote on report to investors last fall.
Beata Caranci, chief economist at TD Bank Group, said Monday that the U.S. tax cut “creates a higher inflation risk” at a time when the economy doesn’t need the stimulus and could even increase the odds of lending-rate hikes stateside.
She said that while markets have factored in the benefits of gains in economic output, they may have underestimated inflationary risks.
But she said fundamentals in both the U.S. and Canada are still pointed in the right direction, suggesting that uncertainty over NAFTA trade talks and the housing market have hampered the TSX, which is heavily weighted to a limited range of sectors.
Adecline on the index that began in late January has wiped out all the gains made since September of 2018, a loss of roughly 6.7 per cent.