Stocks rose on Wednesday, rebounding from a two-day decline, although the TSX underperformed the major U.S. indexes as lumber stocks fell. The real action in Canada was in currency and credit markets, however, with the Bank of Canada’s suggestion that rate hikes could be coming as soon as the second half of 2022 sparking a rally in the Canadian dollar and in bond yields.
The central bank left interest rates unchanged Wednesday, raised its forecasts for economic growth this year, and announced plans to cut its pace of government bond buying - moves that were widely expected. But it also suggested it could start raising interest rates as soon as the second half of 2022 - a hawkish move by the bank that some traders were not positioned for.
The Canadian dollar spiked almost a full cent on the day to just above 80 cents U.S. Bond yields, which jumped immediately on the 10 a.m. (ET) statement from the bank, later retraced some of those gains - but were still higher for the day even as U.S. bond issues were steady to down slightly. The Canadian five-year government bond - a key influencer on fixed mortgage rates - was yielding 0.94% by late afternoon, compared to about 0.90% in the early morning hours. It is still below its recent highs of about 1.05% reached in March.
Since last summer, the bank has said that it will keep its overnight policy rate at the “effective lower bound” of 0.25 per cent until slack in the economy is absorbed and inflation is sustainably hitting 2 per cent. It is now expecting these two conditions to be met by the second half of 2022, instead of 2023.
The bank now expects the Canadian economy to grow 6.5 per cent this year, up from 4 per cent it forecast in January, and notably higher than the 5.8 per cent GDP growth projection the federal government used in its budget on Monday.
The S&P/TSX Composite Index closed up 102.47 points, or 0.54%, at 19,143.25. Both materials and tech stocks rose just over 1%, and the energy sector managed a 0.85% advance despite a dip in crude oil prices.
Oil prices were weighed by concerns that surging COVID-19 cases in India will drive down fuel demand in the world’s third-biggest oil importer. U.S. crude fell 2.11% to $61.35 per barrel and Brent was at $65.33, down 1.86% on the day.
Many of the larger decliners for the day in Toronto were lumber stocks - which have seen huge rallies over the past year as demand spiked for renovations and new home builds. West Fraser Timber fell 6.37%, Western Forest Products 4.21%, and Canfor Pulp Products 2.95%.
On Wall Street, a tilt toward stocks poised to benefit from a recovering economy offset Netflix Inc’s sell-off after its disappointing results.
Shares of Netflix slumped 7.4% after the world’s largest streaming service said slower production of TV shows and movies during the pandemic hurt subscriber growth in the first quarter.
But stocks rallied throughout the day, building steam as the tech-heavy Nasdaq Composite Index overtook the S&P 500 in percentage gain shortly before the close.
Intuitive Surgical In surged 9.9%to an all-time high as its results trounced estimates. The maker of robotic surgical systems vied with Microsoft Corp and Tesla Inc for much of the session as the biggest contributor to the S&P 500′s upside.
Nine of the 11 S&P 500 sectors rose, with communication services, led by Netflix, and the defensive utilities sectors falling.
Economically sensitive value stocks rose 1.1%, outpacing the 0.8% gain in growth even as the growth-oriented but more concentrated Nasdaq climbed more than the S&P.
The Russell 2000 Index of small-cap stocks gained 2.4% in its biggest single-day advance since March 1.
“You take Netflix out of today’s equation, it’s simply a broad-based rally,” said JJ Kinahan, chief market strategist at TD Ameritrade, adding technology shares still had room to run.
The VIX, CBOE’s market volatility index, slid below 18, suggesting the market in days to come could be range-bound while shrugging off a rebound in COVID infections, he said.
Analysts expect S&P 500 companies to post first-quarter earnings growth of 30.9% from a year earlier, Refinitiv IBES data shows.
Netflix’s results dashed expectations but technology remains a major market focus.
“Investors feel more confident of the earnings growth prospects for technology,” said Sam Stovall, chief investment strategist at CFRA Research in New York. ”They would rather gravitate toward the sure thing, which right now is tech stocks.”
The Nasdaq Composite added 1.19% to 13,950.22. The Dow Jones Industrial Average rose 0.93% to 34,137.31, while the S&P 500 gained 0.93% at 4,173.42.
Volume on U.S. exchanges was 9.22 billion shares, down from 10.44 billion average for the full session over the previous 20 trading days.
Advancing issues outnumbered declining ones on the NYSE by a 3.82-to-1 ratio; on Nasdaq, a 3.55-to-1 ratio favored advancers. The S&P 500 posted 86 new 52-week highs and no new lows; the Nasdaq Composite recorded 71 new highs and 58 new lows.
With files from Reuters
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