Canada’s main stock index fell on Tuesday to its lowest closing level in six weeks as the energy and materials sectors led broad-based declines and investors bet on another outsized interest rate hike from the Bank of Canada this week.
Wall Street’s main indexes closed lower as well, with traders assessing fresh economic data in volatile trading.
A survey from the Institute for Supply Management (ISM) showed the U.S. services industry picked up in August for the second straight month amid stronger order growth and employment, while supply bottlenecks and price pressures eased.
The stronger-than-expected reading on the U.S. services sector fueled expectations that the Federal Reserve will keep raising interest rates to tame inflation.
“The Fed has relegated us to being very data dependent, so every piece of information that comes out investors are going to look not only at the absolute level, but try to infer what that means for when the Fed meets,” said Carol Schleif, deputy chief investment officer at BMO Family Office.
“One of the things that is disconcerting to investors is that there’s really little to propel markets either up solidly or down solidly,” she added.
The Bank of Canada has also been tightening monetary policy. It is expected to hike its benchmark rate by three-quarters of a percentage point on Wednesday, lifting it into restrictive territory for the first time in two decades.
Concerns over the supply of energy to Europe and how COVID-19 lockdowns will impact China’s economy also drove markets down on Tuesday, said Shawn Cruz, head trading strategist at TD Ameritrade. “A lot of uncertainty and volatility is not coming from the U.S.; it’s actually coming from overseas.”
The tech-heavy Nasdaq suffered its seventh consecutive day of losses, its longest losing streak since November 2016.
Rate-sensitive shares of Amazon.com Inc and Microsoft Corp fell about 1% as benchmark U.S. Treasury yields rose to their highest levels since June.
Benchmark U.S. Treasury yields rose on expectations that the Federal Reserve will keep hiking interest rates to battle soaring prices and as a slew of corporate debt supply weighed on the market.
The Fed is expected to raise the fed funds rate by another 75 basis points at its Sept. 20-21 meeting, which would bring the range to between 3.0% and 3.25%. That is up from the zero to 0.25% band in March.
Concerns that inflation will remain persistently high if energy prices rise heading into winter is adding to pressure on government bonds. Russia has kept one of its main gas supply routes to Europe shut, stoking fears of winter fuel shortages.
“You have all this fear that more rate increases are going to happen at the central bank level, inflation is not going to dissipate and then you’ve got the quantitative tightening that’s coming pretty rapidly,” said Tom di Galoma, managing director at Seaport Global Holdings in New York.
Beginning this month, the Fed will allow US$95 billion in bonds to roll off its balance sheet each month, including $60 billion in Treasuries and $35 billion in mortgage-backed debt.
Treasuries yields also rose on Tuesday as a slew of companies sold corporate bonds.
The sharpest sell-off in British government bonds since March 2020 added to U.S. debt weakness. This came on concerns about the costs of new Prime Minister Liz Truss’ reported plans to freeze household energy bills at broadly their current level.
Benchmark U.S. 10-year note yields were last 3.336%, the highest since June 16. They have risen from a four-month low of 2.516% on Aug. 2, but are holding below the 11-year high of 3.498% reached on June 14.
Canada’s 10-year bond was up 11 basis points by late afternoon Tuesday, to 3.212%. That’s the highest since mid-July.
The U.S. yield curve between two- and 10-year notes remained inverted at minus 16 basis points, an indicator that a recession is likely in the next one to two years. The inversion is less severe, however, than the minus 56 basis points level reached on Aug. 10.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 182.58 points, or nearly 1%, at 19,088.27. after it was closed on Monday for the Labour Day holiday. The index has given back about 60% of its rally between mid-July and mid-August.
All of the TSX’s major sectors lost ground, including a decline of 2% for energy. Materials, which includes precious and base metals miners and fertilizer companies, ended nearly 1% lower as gold dipped below 1,700 per ounce.
Heavily weighted financials fell 0.8% and consumer discretionary was down 1.3%..
Markets started September on a weak note, extending a slide that started at the end of August, as hawkish comments from Fed policymakers and data signaling U.S. economic momentum raised fears of aggressive interest rate hikes.
The S&P is down nearly 18% so far this year, while the Nasdaq has shed over 26% as rising interest rates hurt megacap technology and growth stocks.
Among the major S&P sectors, energy and communication services were the worst performers, while defensive utilities and real estate rose.
The Dow Jones Industrial Average fell 173.14 points, or 0.55%, to 31,145.3; the S&P 500 lost 16.07 points, or 0.41%, to 3,908.19; and the Nasdaq Composite dropped 85.96 points, or 0.74%, to 11,544.91.
The CBOE Volatility index, known as Wall Street’s fear gauge, touched a near two-month high of 27.80 before closing at 26.91.
Bed Bath & Beyond Inc tumbled 18.4% after Chief Financial Officer Gustavo Arnal fell to his death from New York’s Tribeca skyscraper.
Digital World Acquisition Corp fell 11.4% after Reuters reported the blank-check acquisition firm that had agreed to merge with former U.S. President Donald Trump’s social media company failed to secure enough shareholder support for an extension to complete the deal.
Volume on U.S. exchanges was 10.71 billion shares, compared with the 10.46 billion average for the full session over the last 20 trading days. Declining issues outnumbered advancers on the NYSE by a 2.46-to-1 ratio; on Nasdaq, a 2.12-to-1 ratio favored decliners. The S&P 500 posted no new 52-week highs and 29 new lows; the Nasdaq Composite recorded 19 new highs and 317 new lows.
A major focus will now be on Fed Chair Jerome Powell’s speech on Thursday as well U.S. consumer price data next week for clues on the path of monetary policy.
Reuters, Globe staff
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.