The Globe and Mail
Market Update - An insightful look at what's happening on Bay Street and Wall Street -- and what it means for your money.

February 27, 2017

The close: TSX continues decline as bank, gold shares fall - Dow notches 12th straight record close

Canada’s main stock index posted its lowest close in three weeks on Monday, falling for the fourth straight day as gold stocks declined sharply, while the heavyweight financial services group also lost ground.

The Toronto Stock Exchange’s S&P/TSX composite index unofficially closed down 69.96 points, or 0.45 per cent, at 15,463.51. Just four of the index’s 10 main groups ended lower.

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Valuations in Canada’s financial services sector have risen steadily since early 2016 and particularly since the U.S. election in November on expectations of softer financial regulation, lower tax rates and higher interest rates.

Bank of Nova Scotia fell 1.4 per cent to $79.25 and Bank of Montreal also slipped 1.4 per cent to $98.58. Both banks are due to report quarterly earnings on Tuesday.

Toronto-Dominion Bank, which reports on Thursday, lost 0.5 per cent to $68.91 and National Bank of Canada, which reports on Wednesday, declined 1.4 per cent to $57.

Gold fell after tapping a 3-1/2-month high on Monday as U.S. Treasury yields rose and investors waited for U.S. President Donald Trump to outline plans for tax cuts, infrastructure spending, levies on imports and foreign policy.

Spot gold turned down 0.1 per cent to $1,255.22 an ounce, after rising to $1,263.80, the highest since Nov. 11, but prices failed to hold above the 200-day moving average at $1,260.74.

U.S. gold futures settled up 0.04 per cent at $1,258.80.

Mr. Trump is due to address Congress on Tuesday.

“What he reveals might be important for gold. For example, if he announces significant fiscal easing, that would raise inflation expectations and lead investors into gold,” said Danske Bank analyst Jens Pederson.

“But the border adjustment tax (import tax) could push the dollar higher and that could be negative for gold ... The whole area of foreign policy may mean more political uncertainty and that’s positive for gold.”

Barrick Gold Corp. fell 3.4 per cent to $24.73 and Goldcorp Inc also declined 3.4 per cent to $20.97.

U.S. stocks ended slightly higher on Monday and the Dow hit a record high close for a 12th straight session as Mr. Trump said he would make a “big” infrastructure statement on Tuesday.

The Dow Jones Industrial Average rose 16.09 points, or 0.08 per cent, to 20,837.85, the S&P 500 gained 2.38 points, or 0.10 per cent, to 2,369.72 and the Nasdaq Composite added 16.59 points, or 0.28 per cent, to 5,861.90.

Oil futures’ gains were capped by rising U.S. production even as a global supply glut appeared to ease, while the S&P 500’s energy sector saw the biggest percentage increase among benchmark index sectors.

While many investors were hoping Mr. Trump would unveil details on pro-business policies including tax reform, cash repatriation or infrastructure spending during his address to Congress Tuesday night, others were not ready to make new bets as they worried that the speech would disappoint.

“The markets are just going to do nothing until they get into the address tomorrow night,” said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

“Investors want something concrete on corporate taxes or repatriation. They’re more focused on that than the affordable care act, but the first focus of the administration is ACA.”

The U.S. dollar was up 0.06 per cent against a basket of major currencies after Trump said Monday that tax reform details would not be revealed until after the administration’s proposal on healthcare.

Investors had hoped for “more clarity around tax reform sooner rather than later” said Bipan Rai, senior macroeconomic strategist at CIBC Capital Markets in Toronto.

U.S. 10-year Treasury notes were last down 14/32 in price to yield 2.367 per cent, from a yield of 2.317 percent late Friday. Two-year notes were last down 3/32 in price to yield 1.204 per cent, from a yield of 1.145 percent late Friday.

MSCI’s benchmark world stock index was up 0.1 per cent after it hit a record high Thursday. Europe’s benchmark index of leading 300 shares fell 0.2 percent.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3 per cent, while Japan’s Nikkei fell 0.9 per cent for its lowest close since Feb. 9 on concerns that a stronger yen would crimp corporate earnings.

Oil prices ended little changed on Monday as the prospect for U.S. crude production to continue growing offset reports of high compliance to the OPEC production cut agreement and record bullish bets that prices would rise further.

On its penultimate day as the front-month contract, Brent futures for April delivery lost six cents, or 0.1 per cent, to settle at $55.93 a barrel, while U.S. West Texas Intermediate crude (WTI) gained six cents, or 0.1 per cent, to $54.05.

Investors raised their bets on rising Brent crude oil prices to a new high last week, breaking the 500,000-lot mark for the first time on record, data from the InterContinental Exchange showed.

Money managers also raised their bullish U.S. crude futures and options positions in the week to Feb. 21 to the highest on record, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday.

Investors now hold 951,312 lots’ worth of U.S. and Brent crude futures and options, equivalent to nearly 1 billion barrels of oil valued at more than $52 billion, based on current Brent and WTI benchmark prices.

“With speculators increasing their bullish bets on U.S. crude to an all-time high, the risk of disappointment and subsequent downward spiral in prices has never been greater,” oil brokerage PVM’s Stephen Brennock said.

Among the risks is the level of compliance to the deal between the Organization of the Petroleum Exporting Countries (OPEC) and other producers to bring down oil output by about 1.8 million barrels per day (bpd).

OPEC’s record compliance with the deal has surprised the market, and the biggest laggards, the United Arab Emirates and Iraq, have pledged to catch up with their targets.

The International Energy Agency put OPEC’s average compliance at a record 90 percent in January. Based on a Reuters average of production surveys, compliance stands at 88 percent.

A Reuters survey of OPEC production later this week will show compliance for February.

Iran, Libya and Nigeria, meanwhile, will remain exempted from the production cuts for the first six months of 2017, OPEC’s Secretary General said.

“With bullish speculation already at a record high ... a couple things you have to be concerned about if you are a bull are the rebound in U.S. oil production and growing output from Iran, Nigeria and Libya,” said Kyle Cooper, a consultant for ION Energy in Houston.

U.S. producers boosted crude production to over 9 million bpd during the week ended Feb. 17 for the first time since April 2016 as energy firms search for more oil, according to federal data.

U.S. drillers added five oil rigs in the week to Feb. 24, bringing the total count up to 602, the most since October 2015, energy services firm Baker Hughes Inc said on Friday.

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Market Update is a concise and insightful look at financial market numbers and what’s moving them. You’ll get three updates a day, so you'll always know what’s happening before the North American markets open, at noon, and at the close.