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TSX set for rally after Trump speech, dividend stocks may lag on rethink of Fed rate timing

TMX Group Inc. signage is seen at the Toronto Stock Exchange (TSX) in this file photo.

Pawel Dwulit/Bloomberg

The Trump rally is still on in U.S. and Canadian stocks, with pre-market trading suggesting gains in both markets at the opening bell.

The morning after U.S. President Donald Trump's first speech to Congress, the market appears to have no less faith in his pro-growth agenda, despite the lack of any new specifics.

Comments by U.S. Federal Reserve officials suggesting a stronger case for rate hikes in light of positive economic readings also are playing into market sentiment.

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Future contracts on the S&P/TSX 60 index point to strength in Canadian equities on Wednesday morning, which would help to offset some of the losses from recent sessions. Over the last five trading days, the S&P/TSX composite index has dropped by more than 500 points, or about 3.2 per cent. TSX 60 futures are up about 0.6 per cent as of 730 a.m. (ET).

In an address more notable for its relative shortage of histrionics, Mr. Trump reiterated his commitment to a vast infrastructure spending program and tax cuts for individuals and corporations.

"All told, President Trump painted only a slightly clearer picture in his speech, and markets will continue to await further details for more direction," Royce Mendes, senior economist at Canadian Imperial Bank of Commerce, said in a note.

That direction will have considerable bearing on financials and utilities stocks, which have been the primary beneficiaries of the rally in equities since Mr. Trump won the presidential election in November. In the nearly four months since, the financials sector within the S&P/TSX composite index is up by 12 per cent, while Canadian industrials stocks have advanced by 7.5 per cent.

In the absence of clarity on U.S. economic policy, the Fed may have gone further than Mr. Trump in setting the market's tone for the day.

New York Fed President William Dudley – one of the most influential U.S. central bankers, and usually considered a dove – said the case for tightening monetary policy had become "a lot more compelling", while San Francisco Fed President John Williams said he saw "no need to delay" raising rates.

"Fed members don't just let words slip out when they speak to the press – this was a message for the markets, and the markets have duly reacted," said Kathleen Brooks, Research Director at City Index in London.

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The odds of a rate hike this month priced into the market promptly jumped from about 30 per cent to nearly 70 per cent, according to Reuters data.

The U.S. dollar responded by rising against a basket of currencies, including the Canadian dollar, which fell to its lowest level in nearly two months.

And long-term bond yields in Canada and the U.S. rose, with benchmark 10-year government bond yields in both countries adding close to 5 basis points in morning trading.

That could translate to weakness in Canadian interest rate-sensitive stocks, including utilities and some real estate investment trusts. Meanwhile, higher yields combined with growing economic confidence, are typically received well by cyclical sectors, including financials and industrials.

With files from Reuters

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