Canada’s benchmark stock index closed down 1.8% on Monday to its lowest in almost a year in a selloff that far outpaced Wall Street and inflicted damage on dividend-rich sectors such as utilities and financials in addition to resource stocks.
By contrast, the S&P 500 ended nearly flat, though utilities - an industry that carries considerable debt loads that are vulnerable to higher interest rates - also fell sharply. The Nasdaq edged higher.
Benchmark 10-year U.S. Treasury yields hit 16-year highs, as an agreement to avert a partial government shutdown reduced demand for the debt before key jobs data due later this week.
“U.S. Treasury yields continue to march higher and that’s just crushing the dividend-paying stocks like utilities in Canada,” said Douglas Porter, chief economist of BMO Capital Markets.
Dividend stocks are particularly vulnerable to higher yields as they are relatively less attractive when safer securities such as money market funds are sporting higher interest rate payouts. Meanwhile, higher yields also drive up the U.S. dollar, which in turn puts pressure on commodities that are priced in greenbacks. The TSX has a particularly heavy weighting in both resource and dividend-paying stocks.
The U.S. Congress passed a stopgap funding bill late on Saturday with overwhelming Democratic support after Republican House Speaker Kevin McCarthy backed down from an earlier demand by his party’s hardliners for a partisan bill.
The agreement takes away the risk that the release of government data will be delayed, which would have been likely to keep the Federal Reserve on the sidelines.
“If we had had a shutdown, that really would have put the Fed in a really tough spot for that November meeting,” said Michael Lorizio, senior fixed income trader at Manulife Investment Management in Boston. “You would have essentially had to price out any chance of any sort of Fed action if they had no data to base their next move on.”
The Fed said last month that it may raise interest rates again as it battles to bring inflation closer to its 2% annual target, and that it is likely to hold rates higher for longer.
Fed Chairman Jerome Powell on Monday said that the U.S. central bank is striving to foster a sustained, strong labor market and that price stability is needed in order to achieve that. Fed Governor Michelle Bowman also said Monday that she remains willing to support another increase in the central bank’s policy interest rate at a future meeting if upcoming data shows progress on inflation is stalling or proceeding too slowly.
Fed funds futures traders are pricing in a 26% chance of a rate hike in November, and a 45% likelihood of an increase by December, according to the CME Group’s FedWatch Tool.
Benchmark 10-year Treasury yields reached 4.703%, the highest since October 2007. The yields also rose 48 basis points in September, the largest monthly increase in a year. Canadian bonds largely take their cue from U.S. Treasuries, though the Canadian bond market was closed for a holiday on Monday.
Economic data will be key to when yields are likely to reverse direction, with market participants on the lookout for signs of weakness.
“Deteriorating fundamentals of the U.S. economy is what it will take for rates to materially move lower,” Lorizio said. “There’s reason to believe that if there is evidence of deterioration then all of a sudden U.S. Treasuries become really, really attractive at these elevated rate levels.”
Analysts at JPMorgan said in a report on Friday that the U.S. economy faces “numerous headwinds” in the fourth quarter and “the Fed is most likely done tightening. Against this backdrop, Treasury yields should be finding a peak.”
That said, they added, “we are cognizant that the technical forces driving yields higher over the past few weeks may not yet be behind us.”
This week’s main U.S. economic focus is Friday’s jobs report for September, which is expected to show that employers added 170,000 jobs during the month.
Economic data on Monday showed U.S. factory activity decreased at a shallower-than-expected pace in September, while U.S. construction spending increased in August.
The S&P/TSX composite index was down 364.09 points at 19,177.18, hitting its lowest levels since October of last year. The benchmark index lost 3.7% in September and 3% for the third quarter.
Data showed Canada’s manufacturing sector downturn deepened in September to its lowest level since shortly after the start of the COVID-19 pandemic as weak market demand weighed on production and new orders. The S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI) fell to a seasonally adjusted 47.5 last month, from 48.0 in August.
The TSX materials sector, which includes miners and fertilizer companies, dipped 2.8% as gold extended its decline for the sixth straight session to its lowest since the fourth quarter of last year.
The energy sector dropped 2.4%, tracking a decline in global benchmarks Brent crude oil and U.S. West Texas Intermediate crude futures.
Rate-sensitive utilities fell 3.7% in Toronto. Industrials stocks fell 1.1%.
The financials index declined 1.8%. Shares of Laurentian Bank fell more than 5.9% after the country’s ninth-largest lender named insider Eric Provost as CEO, weeks after announcing it would simplify its organizational structure following its failure to find a buyer during a strategic review.
The Dow Jones Industrial Average fell 74.15 points, or 0.22%, to 33,433.35, the S&P 500 gained 0.34 points, or 0.01%, at 4,288.39 and the Nasdaq Composite added 88.45 points, or 0.67%, at 13,307.77.
S&P 500 companies begin to report third-quarter results later this month, with analysts expecting earnings to have risen 1.6% from the year-ago quarter after falling 2.8% in the second quarter, according LSEG IBES data Friday.
“We ended September with a market that was enveloped by uncertainty,” said Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina. All three major indexes posted losses for September and the last quarter. “Coming into this month, it’s a market that needs confirmation that earnings are working their way higher. And, what’s crucial for the market is to ascertain where the Fed is headed,” she said.
Rate-sensitive utilities was the day’s worst-performing S&P sector, falling 4.7% in its biggest one-day percentage decline since April 2020. Energy also fell sharply along with lower oil prices, while technology was up 1.3%.
Tesla shares ended up 0.6% even as the electric vehicle maker missed market estimates for third-quarter deliveries.
Among S&P utilities, shares of NextEra Energy fell 9% and hit their lowest level in about 3-1/2 years.
Volume on U.S. exchanges was 10.84 billion shares, compared with the 10.49 billion average for the full session over the last 20 trading days. Declining issues outnumbered advancers on the NYSE by a 4.61-to-1 ratio; on Nasdaq, a 2.43-to-1 ratio favored decliners. The S&P 500 posted two new 52-week highs and 52 new lows; the Nasdaq Composite recorded 24 new highs and 327 new lows.
Reuters, Globe staff