Traders work on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell July 6.LUCAS JACKSON
Canadian stocks climbed on Friday as a resurgence in U.S. job creation in June showed resilience in the economy of Canada's largest trading partner, offsetting a decline in the domestic payroll.
The S&P/TSX Composite Index rose 0.89 per cent, or 125.38 points, to 14,259.84 in Toronto. The gains were broad and significant with five of the index's 10 main sectors notching gains of more than 1 per cent as investors focused on the bumper number from the much larger economy of the United States.
Canada's job market weakened in June, capping the worst quarter for payrolls in two years. Employment fell by about 700 in June, short of economists' forecasts for a 5,000 gain, while the jobless rate unexpectedly dropped to 6.8 percent from 6.9 per cent as Canadians left the job market.
Traders are now pricing in 20-per-cent odds Canada's central bank will cut interest rates in December, about half where the probability was on Thursday, according to data compiled by Bloomberg.
By contrast, U.S. payrolls surged by 287,000 last month, topping the highest estimate in a Bloomberg survey and accelerating the most since October. The unemployment rate rose to 4.9 per cent as more people entered the workforce. The U.S. is Canada's largest trading partner by a wide margin, accounting for more than $540-billion in trade last year, according to data compiled by Bloomberg.
"The weak details reinforce the view that Canada's job market is struggling to stay above the waterline," said Douglas Porter, chief economist at Bank of Montreal, in a note to clients. "The consolation prize for the Bank of Canada was the nice, solid comeback in U.S. jobs last month, which suggests our biggest trading partner is still rolling along."
Royal Bank of Canada and Bank of Nova Scotia each added at least 0.7 per cent as financial services stocks contributed to Friday's gains. Energy producers increased 1.5 per cent as a group as crude futures rose in New York to trim a weekly drop.
Canadian equities have swung between gains and losses since the Brexit vote two weeks ago as investors sought havens from the market volatility. Raw-materials producers remain the top-performing industry in Canada this year with a 56-per-cent increase, the best such performance for the group in at least 30 years, according to data compiled by Bloomberg. Energy stocks have rallied 18 per cent.
Amid the volatility Canadian stocks remain more expensive than their U.S. peers, with a price-earnings ratio of 21.9 for the S&P/TSX about 12 per cent higher than the S&P 500.
The benchmark S&P 500 stock index briefly traded above its record close on Friday as Wall Street rallied after a much-larger-than-expected print in jobs growth confirmed the U.S. economy has regained speed after a first-quarter lull.
Gains on Friday capped an eight-day rebound of more than 6 per cent that restored $1.4-trillion of market capitalization to U.S. shares, value that was erased in the aftermath of the U.K. vote to leave the European Union. The S&P 500 advanced more than 1 per cent for the fourth time in two weeks after stronger June payroll growth calmed concerns sown by May's anemic number.
The benchmark gauge surged as much as 1.6 per cent to eclipse the all-time high after spending 286 days trading without making a fresh record, the longest stretch outside a bear market since a 361-day drought in 1960 and '61. The pause came amid concern over rising interest rates and falling profits, after the index more than tripled from its 2009 bottom.
The S&P 500 unofficially added 1.53 per cent to 2,129.9 in New York, after briefly rising above the 2,130.82 closing record from May 2015. The Dow Jones Industrial Average rose 1.4 per cent to erase its post-Brexit losses. The Nasdaq Composite Index advanced 1.64 per cent.
"The big fear after Brexit is 'Is there an add-on effect? Does it slow economic growth?"' said Tom Anderson, Chief Investment Officer for Boston Private Wealth, which oversees $7-billion. "This data is obviously from before the Brexit vote primarily and suggests the U.S. economy is still in good shape and continues the power forward. It's encouraging and what U.S. investors are looking for."
The valuations edge held by stocks over bonds has gotten extreme of late as government debt rallied, with the S&P 500's earnings yield - profits as a proportion of share price - climbing above 5 per cent, or about 3.7 percentage points above the 10-year Treasury rate. The gap is wider than any point during the 2002-2007 rally.
The jobs data will help reassure policy makers that companies are staying the course on hiring in the face of weaker profits and overseas developments such as Britain's vote to leave the EU. Federal Reserve officials flagged concern over job creation at their last meeting, signaling fading urgency for the need to increase interest rates.
"The strength you're seeing in U.S. equities is a knee-jerk reaction to any kind of big number that comes out," said Stephen Carl, principal and head equity trader at Williams Capital Group LP. "This will only add to the Fed's indecision over what to do. The conviction for a Fed rate hike won't quite be there yet, which could explain why we're reacting positively."
The one-two punch from May's weak employment report and the U.K.'s vote to secede had all but erased any wagers on a Fed rate increase this month, after probabilities for a move were 55 per cent at the beginning of June. Despite the rebound in job gains last month, traders are still pricing in less than even odds of a boost to borrowing costs until December 2017.
As latest bout of global anxiety ebbs, the CBOE Volatility Index sank 9.2 per cent Friday to 13.41, a one-month low. The measure of market turbulence known as the VIX was on the way to the first back-to-back weekly declines since April, slipping almost 14 per cent in the last three days. A Goldman Sachs basket of most shorted shares in the Russell 3000 Index rallied for the seventh time in eight days, rising 12 perc ent in the period.
Investors are also waiting for cues on the health of corporate America, with Alcoa Inc. unofficially kicking off the second-quarter earnings season next week. Analysts predict profits will drop 5.7 per cent at S&P 500 firms, which would make it the fifth straight quarterly decline, the longest streak since 2009.
The rally in 2016 has been led by double-digit gains in industries often considered by investors as "defensive" groups. Utility and phone companies are up the most on the year, posting advances of at least 20 per cent, with utilities this week reaching a record. In Friday's trading, all of the S&P 500's 10 main industries rose.
Crude prices inched up in choppy trading on Friday but Brent notched its largest weekly drop in nearly six months, as strong U.S. jobs data and bargain hunting by investors pitted against seasonally weak consumption of oil.
The oil market initially rose about 1 per cent or more after the U.S. economy posted the largest job gains in eight months in June and on worries about fresh militant attacks on Nigerian oil infrastructure.
Oversupply concerns, however, resurfaced with data showing the U.S. oil rig count rose by 10 this week as drillers added rigs for a fifth week in six as analysts to predict the near two-year slump in drilling has bottomed and production will start to edge up early next year.
"Some of the gloom and doom on demand destruction for oil has gone away with the U.S. jobs numbers," said Phil Flynn, analyst at Chicago-based brokerage Price Futures Group.
Brent crude futures ended the session up 36 cents, or 0.8 per cent, at $46.76 per barrel, after trading between $47.23 and $46.15.
U.S. crude's West Texas Intermediate (WTI) futures settled up 27 cents at $45.41, compared with an earlier drop to $44.77 and a high of $45.97.
Both benchmarks were down nearly 8 per cent for the week - the largest weekly slide for Brent since January and the biggest weekly drop for WTI since February.
Crude futures remain some 75 per cent above 12-year lows of $27 for Brent and $26 for WTI hit in the first quarter. But the market has gyrated since hitting above $50 as a glut of refined products replaced worries about crude oversupply that caused a near two-year long tumble earlier.
Futures hit two-month lows on Thursday, with WTI breaking below key support of $45.83 after weekly drawdowns in U.S crude looked inadequate to assuage investor concerns.
"While we are bullish for next year, we continue to be cautious for the rest of this year," Societe Generale oil analyst Michael Wittner said.
"For the time being, the path of least resistance for oil prices is lower."
With files from Reuters