A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, April 4.Michael Nagle/Bloomberg
Canadian stocks fell a third day on Monday, as a rally led by raw-material producers in the first quarter shows signs of petering out.
The Standard & Poor's/TSX Composite Index fell 0.78 per cent, or 104.29 points, to 13,336.15 in Toronto. While the Canadian benchmark equity gauge has lost 1.2 per cent in a three-day slide, it's still up 2.4 per cent this year and remains one of the best-performing developed markets in the world, trailing only New Zealand.
The resource-fueled rally through February and March that propelled the S&P/TSX in the first quarter of the year has not continued in the start of the second, as commodities from gold to copper and crude have retreated. The broader S&P/TSX's valuation has slipped from last month's high of 21.9 times reported earnings to 21.3 times. That's 13 per cent more expensive than the 18.8 times multiple of the Standard & Poor's 500 Index, data compiled by Bloomberg show.
"Are global portfolio managers ready to underweight Canada again? The answer to this question is yes," Javed Mirza, a technical analyst with RBC Capital Markets, said in a research note. "Given the larger weighting of energy in the TSX, deterioration in energy will be an additional headwind for the S&P/TSX Composite relative to other resource-light equity indexes."
Mr. Mirza says the potential peak and subsequent correction in energy stocks now is an opportunity to buy into the industry at a more attractive level in the summer. The S&P/TSX Energy Index is up over 5 per cent this year.
Oil dropped to a one-month low after Saudi Arabia's deputy crown prince said his country will freeze output only if Iran follows suit, putting in doubt the prospects of a proposed deal to freeze supply. Gold sank for a second day while copper is down seven days in a row, its worst run since February 2014. Raw-materials producers dropped 2.1 per cent Monday, the most in the S&P/TSX, while financials and energy producers also retreated.
Oil futures slipped 3 per cent in New York. Saudi Arabia's Mohammed bin Salman signaled in an interview with Bloomberg last week that if any country raises output, his nation will also increase sales. Producers are scheduled to meet this month to discuss an agreement on capping supplies. Iran's oil minister said he'll attend the gathering if he finds the time. Russian oil production reached a post-Soviet high in March.
"The discipline and unity needed for a freeze is missing," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Conn. "Russian production in March rose to a new post-Soviet record, Iranian exports appear to be rising and the Saudis poured cold water on the idea of a freeze last week. This is not a picture that supports $40 oil."
BlackBerry Ltd. lost 2.4 per cent for a second day of losses, slipping to a seven-week low. The smartphone maker reported fourth-quarter sales short of analysts' estimates on April 1, as it works to shift its business towards software and services.
U.S. stocks slipped from their highest levels this year, with declines in consumer and industrial shares overshadowing gains in health-care companies, as investors looked for fresh reasons to continue a rally.
Equities extended a retreat along with crude oil in afternoon trading.
The Dow Jones industrial average lost 55.75 points, or 0.3 per cent, to 17,737. The Standard & Poor's 500 index lost 6.65 points, or 0.32 per cent, to 2,066.13 and the Nasdaq composite lost 22.75 points, or 0.46 per cent, to 4,891.8.
"There's a big divergence in opinion right now over whether this rally is a head fake or not," said Craig Sterling, head of U.S. equity research at Pioneer Investments in Boston. "Stocks have gone up on not a lot of volume and we're kind of at an inflection point right now. If we see a leg down in oil or bad macro data, or the rate trade doesn't go the right way for equities, then we're back to where we started the year."
The main U.S. equity benchmark retreated after extending 2016 gains on Friday, an advance that came amid reports showing the pace of job creation remained robust and manufacturing activity improved. That bolstered confidence in the economy, while central banks have signalled they will continue their efforts to support growth.
The S&P 500 staged a rebound in the second half of the last quarter, erasing losses of as much as 11 per cent, helped by a rally in crude oil and easing concerns that a global slowdown will deepen. Still, recent gains have come in light trading, with the benchmark going its longest without a daily move of 1 per cent in more than a year. The index was about 3 per cent from a record reached last May, and is one of three developed-market indexes that has erased losses for the year.
Meanwhile, the Chicago Board Options Exchange Volatility Index closed Friday at the lowest since August, 26 per cent below its average over the past year. The measure of market turbulence known as the VIX rose 6.9 per cent Monday to 14.
Following Fed Chair Janet Yellen's reassurance last week that the pace of future rate increases will be gradual, traders are pricing in zero possibility of a hike at the end of April, with December now the first month with at least even odds of higher borrowing costs. A report today showed a measure of factory orders declined in February, suggesting business investment will be a drag on growth again in the first quarter. Minutes from the Fed's meeting last month are due for release on Wednesday.
Tesla Motors Inc. rose after Chief Executive Officer Elon Musk said pre-orders for its Model 3 electric car reached 276,000 by Saturday night. Virgin America Inc. surged 41.7 per cent after Alaska Air Group Inc. agreed to buy it.
The Stoxx Europe 600 Index added 0.4 per cent, and the MSCI Asia Pacific Index increased 0.4 per cent. The rebound in European shares has stalled for more than two weeks. With a valuation of about 14.7 times estimated earnings, the Stoxx 600 traded at its lowest level since January 2015 relative to the S&P 500 on Friday.
The MSCI Emerging Markets Index slipped 0.1 per cent, after a 1.3-per-cent drop on Friday, its worst one-day slide in more than two weeks.
West Texas Intermediate for May delivery fell $1.09 to close at $35.70 a barrel on the New York Mercantile Exchange. It's the lowest settlement since March 3.
Brent for June settlement dropped 98 cents, or 2.5 per cent, to $37.69 a barrel on the London-based ICE Futures Europe exchange. Futures ended the session at the lowest level since March 3. The global benchmark crude closed at a 66-cent premium to WTI for June delivery.
Oil-producing countries are discussing a draft resolution for the Doha meeting, Russian Energy Minister Alexander Novak told reporters in Novokuznetsk, Russia. The meeting may lead to a decision on tools to monitor output levels, he said.
The Saudi conditions "effectively put the nail in the coffin" on the recent price rally, BNP Paribas analysts Gareth Lewis-Davies and Harry Tchilinguirian said in an e-mailed note Monday. Crude prices could easily revisit the lows of the year, they said in the note.
With files from Reuters