The TSX and all three of Wall Street’s major indexes closed up more than 1% on Thursday, as investors considered the Federal Reserve’s path for interest rate hikes and worries eased about the prospects of a Russian default after creditors received payments. It was the highest close ever for the Canadian benchmark index.
Investors were reassured that Russia may, at least for now, have averted what would have been its first external bond default in a century. This was because creditors received payment, in U.S. dollars, of Russian bond coupons which fell due this week, two market sources told Reuters on Thursday.
The S&P 500, the Dow Jones Industrial Average and the Nasdaq registered their biggest 3-session percentage gain since early November 2020 after the reports boosted risk appetites in a market already benefiting from bargain hunting. The S&P 500 also witnessed its third straight day of more than 1% advances.
Gains were broad across sectors in Toronto, with energy, technology and materials stocks all rallying sharply. The energy sector rose 3.5%, as oil prices climbed 8%. In wild trading, the commodity rebounded from several days of losses with a renewed focus on supply shortages in coming weeks due to sanctions on Russia.
The Fed had raised interest rates by a quarter of a percentage point on Wednesday as expected and forecast an aggressive plan for further hikes while policymakers also trimmed economic growth projections for the year.
The Russian payment news and a breaking of technical decline lines “to the upside” in indices, including the S&P 500 and the Nasdaq, all boosted stocks, according to Michael James, managing director of equity trading at Wedbush Securities.
“It’s giving investors an increased level of cautious optimism which is a change from the significant pessimism we’ve been experiencing since early January,” said James.
“People have gotten more comfortable with the fact rates are going higher. This has been talked about ad nauseum by Chairman (Jerome) Powell since early December,” he said. “The fact there were no significant negative surprises in the Fed’s plans coming out of the meeting, and Powell’s commentary, gave people a sense that maybe we’ve seen as bad as it’s going to get in the near term.”
Describing the Fed’s plans as dovish, Phil Blancato, CEO of Ladenburg Thalmann Asset Management in New York also said the continuation of Russia, Ukraine peace talks helped the mood.
“What you’re seeing today simply as a spillover effect from yesterday,” said Blancato. “There’s a potential resolution for the conflict overseas, the positive effects of the Federal Reserve and stocks at a very fair entry point, providing an opportunity to add risk.”
The S&P/TSX composite index ended up 302.39 points, or 1.41%, at 21,771.22, eclipsing the previous peak it notched in November last year.
Ten of 11 major TSX sectors ended higher. The materials group, which includes precious and base metals miners and fertilizer companies, added 2.6% as gold and copper prices moved higher. Technology, which has been pressured this year by the prospect of higher interest rates, was up 2.7%. It was helped by a 15.9% gain for Lightspeed Commerce Inc.
The TSX has outperformed many global benchmarks this year, with investors embracing the commodity-linked stock market to protect their portfolios from the impact of supply shortages and soaring inflation.
The Dow Jones Industrial Average rose 417.66 points, or 1.23%, to 34,480.76, the S&P 500 gained 53.81 points, or 1.23%, to 4,411.67 and the Nasdaq Composite added 178.23 points, or 1.33%, to 13,614.78.
The energy sector was the biggest percentage gainer among the S&P’s 11 major industry sectors, ending up 3.5%.
The sector laggards were more the most defensive industries with utilities adding just 0.5% and consumer staples , which rose 0.6%.
The interest rate sensitive S&P banks index ended the session slightly higher after falling 2% earlier in the session and rallying 3.7% on Wednesday.
Russian and Ukrainian officials met again on Thursday for peace talks, but said their positions were far apart.
Earlier on Thursday, data showed weekly jobless claims fell last week as demand for labor remained strong, positioning the economy for another month of solid job gains.
Advancing issues outnumbered declining ones on the NYSE by a 4.10-to-1 ratio; on Nasdaq, a 2.93-to-1 ratio favored advancers. The S&P 500 posted 18 new 52-week highs and no new lows; the Nasdaq Composite recorded 46 new highs and 53 new lows. On U.S. exchanges 12.88 billion shares changed hands compared with the 20 day moving average of 14.18 billion.
Benchmark Brent crude futures added $8.62, or 8.79%, at $106.64 a barrel, its largest percentage gain since mid-2020. U.S. West Texas Intermediate (WTI) crude rose $7.94, or 8.35%, to $102.98 a barrel.
Oil benchmarks in recent weeks have undergone their most volatile period since mid-2020. After sliding as buyers cashed in on the run-up, prices resurged on expectations that shortages will soon squeeze the energy market.
In the last eight trading sessions, Brent oil per barrel has traded as high as $139 and as low as $98 - a more than $40 spread. That has pushed many investors to exit, creating conditions for more wild price swings in the weeks ahead, traders, bankers and analysts said.
Numerous nations have banned purchases of Russian oil to punish Moscow for its invasion of Ukraine nearly three weeks ago. Russia, which calls the military action a “special operation,” is the world’s biggest exporter of crude oil and fuel products. Refiners and end-users must make quick adjustments for coming weeks.
The International Energy Agency said 3 million barrels per day (bpd) of Russian oil and products could be shut in from next month. That loss would be far greater than an expected drop in demand of 1 million bpd from higher fuel prices, the IEA said.
Russian Deputy Prime Minister Alexander Novak said energy supplies from Russia would remain stable despite what he described as the tense geopolitical situation, the Interfax news agency reported.
Morgan Stanley raised its Brent price forecast by $20 for the third quarter to $120 a barrel, predicting a fall in Russian production of about 1 million bpd from April.
The bank noted that loadings continue at Russian ports, but the share with “destination unknown” is rising. More Russian tankers are on the water as these exports are “starting to struggle to find a market,” it added.
The supply squeeze will more than offset a downward global demand revision of about 600,000 bpd, the bank said.
Meanwhile, sentiment brightened in oil after China pledged policies to boost financial markets and economic growth, while a decline in new COVID-19 cases there spurred hopes lockdowns will be lifted and factories will resume production.
A closely watched part of the yield curve, the one comparing two-year U.S. Treasuries with 10-year notes, flattened to 24.5 basis points on Wednesday after the Fed announcement.
That gap became even smaller on Thursday, hitting 18.5 basis points in intraday trade, the flattest since March 2020, although it bounced back to 24.7 basis points later on Thursday.
The flattening of the curve reflects market concerns that the Fed may tighten monetary policy too aggressively, to the point of hurting economic growth or even causing a recession.
A less closely watched part of the yield curve, the one plotting three- and 10-year bonds, inverted intraday on Thursday, but it then bounced back to 4.7 basis points.
The last time that corner of the curve inverted was in March 2007, Citi strategists said in a note, adding further inversions were a matter of time.
“It’s almost a mechanical thing from here, curve-wise”, they said in a note.
Curve inversions in some parts of the curve, such as the 2s10s, are seen as predicting an upcoming recession in the next year or two.
Jim Reid, a strategist at Deutsche Bank, noted that on average it took around three years from the first Fed hike for the economy to tip into recession though all but one of those recessions occurred within 37 months when the 2s10s curve inverted before the hiking cycle ended.
Most Fed policymakers now see the federal funds rate rising to a range between 1.75% and 2% by the end of 2022, the equivalent of a quarter-percentage-point rate increase at each of the Fed’s six remaining policy meetings this year. They project it will climb to 2.8% next year - above the 2.4% level that officials now feel would work to slow the economy.
Fed funds futures traders are pricing the federal funds rate to rise to 2.12% next February.
The benchmark 10-year Treasury bond yields jumped after the Fed announcement on Wednesday as high as 2.246% from 2.149% a day earlier, but they eased back on Thursday, to around 2.19%.
Reuters, Globe staff
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