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North American stock markets ended lower on Monday, interrupting last week’s rally, as investors turned cautious ahead of U.S. employment data due this week that could alter expectations that the Federal Reserve will cut interest rates early next year.

The S&P 500 receded, with megacaps Microsoft, Apple, Nvidia and Amazon dipping over 1%, pressured by higher U.S. Treasury yields, which made returns on stocks less attractive.

The S&P 500 registered its highest close of the year on Friday as remarks from Fed Chair Jerome Powell acknowledged the central bank’s need to “move forward carefully” amid signs of economic softening, comments that bolstered expectations the Fed has finished raising rates.

Small-cap stocks rose on Monday, with the Russell 2000 rallying about 1% and bringing its gain this year to almost 7%.

“There is a lot of chop around here that is not necessarily meaningful,” said Tom Martin, a senior portfolio manager at GLOBALT Investments in Atlanta. “We have a really important Fed meeting coming up, and what makes it important is that all of a sudden, the market has decided that they’re going to cut early next year.”

The Toronto Stock Exchange’s S&P/TSX composite index ended down 42.66 points, or 0.2%, at 20,410.21, after posting on Friday its highest closing level in two and a half months.

The energy sector fell 1.6% as the price of oil settled 1.4% lower at US$73.04 a barrel, with traders taking a wait-and-see attitude about plans by OPEC and its allies to cut production in the first quarter.

The materials group, which includes precious and base metals miners and fertilizer companies, also lost 1.6% as gold pulled back from an all-time high. Gold was down 2.1% at about US$2,028 per ounce.

In contrast, the TSX consumer staples sector, which is seen as defensive due to its composition of companies that produce predictable cash flows, added 0.4%, while financials ended up 0.1%. The sector was building on gains last week when Canada’s six major banks reported earnings.

“The banks have been very conservative in their loan loss provisioning,” said Philip Petursson, chief investment strategist at IG Wealth Management. “Valuation is attractive, yields are attractive, so I think you could see banks being a little bit more of a defensive play.”

Among the Toronto stocks that performed best was Nuvei Corp. Its shares gained 6.3% after the fintech company entered into a global payments partnership with Microsoft Corp.

On Wall Street, the S&P 500 declined 0.54% to end the session at 4,569.78 points.

The Nasdaq declined 0.84% to 14,185.49 points, while Dow Jones Industrial Average declined 0.11% to 36,204.44 points.

Ride-hailing service Uber Technologies rallied 2.2% after an announcement on Friday it will join the S&P 500 effective Dec. 18.

Shares of Alaska Air Group tumbled 14% after the carrier said on Sunday it would acquire peer Hawaiian Holdings for $1.9 billion, including debt. Hawaiian’s shares nearly tripled in value, helping lift the Russel index.

This week’s main macroeconomic focus will be Friday’s jobs report for November, which may help investors gauge the Fed’s likely interest rate path, as well as the potential for a “soft landing” - where the Fed manages to bring inflation under control while averting a recession.

Traders widely expect the central bank will keep rates unchanged at its meeting next week. Interest rate futures suggest a 58% probability the Fed will start cutting rates by March 2024, according to the CME Group’s FedWatch tool.

However, some analysts warn that markets have been too quick to price in lower interest rates.

Adding to declines on Monday were renewed fears about a widening of the war in Israel and Gaza after an attack on three commercial vessels in the southern Red Sea.

Shares of cryptocurrency firms such as Coinbase Global , Riot Platforms and Marathon Digital rallied between 5% and 9% after bitcoin crossed $40,000 for the first time this year.

Advancing issues outnumbered falling ones within the S&P 500 by a 1.0-to-one ratio.

The S&P 500 posted 38 new highs and no new lows; the Nasdaq recorded 125 new highs and 63 new lows.

The S&P 500 has gained 19% so far in 2023, while the Nasdaq has recovered 24%.

Volume on U.S. exchanges was relatively heavy, with 12.7 billion shares traded, compared to an average of 10.6 billion shares over the previous 20 sessions.

The Canadian dollar weakened against its U.S. counterpart, pulling back from a two-month high, as investor appetite for risk declined and ahead of the Bank of Canada’s interest-rate decision this week. It’s widely expected to make no change to its key lending rate.

The loonie was trading 0.4% lower at 1.3550 to the greenback, or 73.80 U.S. cents, after earlier touching its strongest level since Sept. 29, at 1.3481.

Canadian government bond yields rose across the curve, tracking moves in U.S. Treasuries. The 10-year was up 7 basis points at 3.492% after touching on Friday its lowest level since July 25, at 3.422%.

Reuters, Globe staff

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