Pedestrians walk past the New York Stock Exchange on Friday, July 8, 2022, in New York.John Minchillo/The Associated Press
Canada’s main stock index fell on Thursday to a new 16-month low as the recent inversion of Canada’s yield curve, and poorly received earnings results from two giant U.S. banks, weighed on financial shares.
Materials stocks also tumbled, after Citibank downgraded its ratings and aggressively slashed price targets on copper miners, believing a looming recession would significantly dent demand and hurt prices for the metal.
The S&P/TSX composite index ended down 286.13 points, or 1.5%, at 18,329.06, its fifth straight day of declines.
To tackle soaring inflation, the Bank of Canada on Wednesday raised its benchmark rate by a full percentage point, its biggest hike in 24 years.
The move helped drive short-term bond yields further above longer-term rates, a phenomenon known as curve inversion that can sometimes signal risk of a recession and tends to reduce the margins that banks earn on their loans.
Banks generate higher profits when short-term rates are lower than long-term rates. Rate hikes could also slow the economy, weighing on mortgage lending growth.
The Toronto market’s financial sector, which accounts for 31% of the index’s market capitalization, tumbled 3.2%, led by a 5.63% drop in Royal Bank of Canada. That was RBC’s biggest drop since March of 2020, when markets were in freefall amid COVID-related economic shutdowns.
The energy sector was down 1.7% as U.S. crude prices settled 0.5% lower at $95.78 a barrel, after clawing back much of its earlier decline.
The materials sector lost about 3%. First Quantum Minerals lost 8.2%
On Wall Street, the S&P 500 pared early losses to close modestly lower after investors digested disappointing quarterly results from the two large U.S. banks and hotter-than-expected inflation data.
Initially, all three major U.S. stock indexes sold off sharply in the wake of second-quarter earnings from JPMorgan Chase & Co and Morgan Stanley. Both reported slumping profits and warned of impending economic slowdown.
Losses narrowed as the session wore on, with advancing microchip stocks helping nudge the Nasdaq Composite Index to a nominal gain.
“There was an irrational response to the JPMorgan and Morgan Stanley results,” said Jay Hatfield, chief executive and portfolio manager at InfraCap in New York. “It wasn’t a surprise that investment banking was weak.”
“JPMorgan warned that there’s uncertainty in the market, but if you’re alive and breathing you know there’s uncertainty in the market.”
JPMorgan CEO Jamie Dimon struck a cautious note on the global economy while Morgan Stanley’s investment banking unit struggled to cope with a slump in global dealmaking.
Shares of JPMorgan Chase and Morgan Stanley fell 3.5% and 0.4%, respectively, while the S&P Banks index shed 2.4%.
Slowdown worries were exacerbated as the Labor Department’s Producer Price Index report echoed Wednesday’s Consumer Price Index data, showing hotter-than-expected inflation in June.
The sell-off began to ease after Fed Governor Christopher Waller said he supported another 75 basis point interest rate increase in July, easing jitters over an even bigger, 100 basis point hike.
But he said he would lean toward a larger hike if incoming data shows demand is not slowing fast enough to bring inflation down.
“Markets may have gotten ahead of themselves a little bit yesterday,” Waller said.
St. Louis Fed President James Bullard also would prefer to lift rates by 75 bps at the next Fed meeting, telling the Japanese news service Nikkei in an interview on Thursday that he does not back a larger increase for now.
Following the Fed officials’ comments, U.S. Fed funds futures priced in just a 42% chance of a 100-basis point hike at the Fed meeting this month, compared with around 86% before the statement from Waller who spoke ahead of Bullard, according to CME’s FedWatch.
On Wednesday, the odds of a larger hike grew after the CPI report.
The inversion on the U.S. two-year/10-year yield curve shrank on Thursday to as low as 15 bps, from as much as 27.6 basis points (bps) earlier, the most since September 2000, Refinitiv data showed.
Investors are nervous because the 2/10 inversion specifically preceded the last eight recessions, including 10 of the last 13, analysts said.
The Canada 10-year bond was closed to unchanged on Thursday afternoon, at 3.149%.
The Dow Jones Industrial Average fell 142.62 points, or 0.46%, to 30,630.17, the S&P 500 lost 11.4 points, or 0.30%, at 3,790.38 and the Nasdaq Composite added 3.60 points, or 0.03%, at 11,251.19.
Eight of the 11 major sectors of the S&P 500 ended the day in negative territory, with financials suffering the largest percentage loss, dropping 1.9%.
Tech was the biggest gainer.
With earnings season officially underway, analysts expect aggregate S&P 500 second-quarter year-on-year profit growth of 5.1%, far less than the 6.8% estimate at the beginning of the quarter, according to Refinitiv.
U.S.-listed shares of Taiwan Semiconductor Manufacturing rose 2.9% following the chipmaker’s upbeat revenue guidance.
Conagra Brands tumbled 7.2% after issuing an annual earnings forecast that came in below estimates.
Declining issues outnumbered advancers on the NYSE by a 3.11-to-1 ratio; on Nasdaq, a 2.12-to-1 ratio favored decliners. The S&P 500 posted one new 52-week high and 44 new lows; the Nasdaq Composite recorded nine new highs and 294 new lows. Volume on U.S. exchanges was 10.86 billion shares, compared with the 12.48 billion average over the last 20 trading days.
In currency markets, the Canadian dollar weakened by more than 1% against the greenback, while also losing ground against most other G10 currencies.
The safe-haven U.S. dollar rallied against a basket of major currencies after the latest red-hot U.S. inflation reading.
The Canadian dollar was trading 1.1% lower at 1.3110 to the greenback, or 76.28 U.S. cents, after touching its weakest since November 2020 at 1.3223.
Reuters, Globe staff
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