Canada’s main stock index fell on Tuesday by the most since mid-August as the prospect of higher borrowing costs to tackle inflation made it less appealing to make big bets, particularly during a seasonally weak period for the market.
The S&P/TSX composite index ended down 273.94 points, or 1.3%, at 20,218.89, its biggest decline since Aug. 15.
“We’re not making big moves right now because we see a lot of crosscurrents,” said Joseph Abramson, co-chief investment officer at Northland Wealth Management. “The seasonality is tough, rising interest rates are leading to valuation compression but it’s too early to start talking about reaccelerating growth.”
Canada’s annual inflation rate in August jumped to 4.0% from 3.3% in July on higher gasoline prices, a sign the Bank of Canada may be forced to raise interest rates yet again after ten hikes since March of last year.
Money markets were not positioned for such a hot inflation number. Canadian bond yields shot up immediately, with the five-year bond yield - influential on where fixed mortgage rates are set - up 17 basis points by late afternoon to a fresh 16-year high of 4.22%.
The move came as credit markets quickly priced in stronger odds that the Bank of Canada may again hike its trend-setting overnight rate to combat inflationary pressures. Implied probabilities in swaps markets suggest about a 40% chance that the BoC will hike rates again at its next policy meeting on Oct. 25. Markets were only pricing in about a 21% chance of another quarter-point hike prior to the inflation report. By December’s BoC policy meeting, swaps markets are now pricing in better-than-50% odds that the overnight rate will be higher than it stands today.
While not to the same degree, U.S. Treasury yields also rose on Tuesday, with U.S. five- and 10-year Treasury yields reaching 16-year highs. The move came a day before the Federal Reserve will conclude its two-day monetary policy meeting.
Oil prices are trading near 10-month highs as weak U.S. shale output compounded supply concerns from extended production cuts by Saudi Arabia and Russia. This is raising fears that higher commodity prices will keep price pressures elevated and lead the Fed to hike rates further, or keep them elevated for longer.
“We have a bit of an upward bias on yields as a function of higher energy prices and increasing concern that that’s going to flow through to end users and complicate the Fed’s job of attempting to engineer a soft landing,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
Five-year notes hit 4.522% and 10-year yields reached 4.367%, both the highest since 2007.
Higher bonds yields normally pressure dividend-paying sectors of the equity market, as well as technology stocks.
But the selloff in Canadian stocks was widespread, with all ten of the TSX’s 10 major sectors ending lower, including a decline of 2.1% for technology, its second straight day of steep declines.
Heavily-weighted financials fell 0.8% and the materials group, which includes precious and base metals miners and fertilizer companies, was down 1.9%.
Among stock moves, Equinox Gold Corp shares tumbled nearly 20% after the mining company launched a convertible senior notes offering.
Energy lost 1.1% as U.S. oil futures settled 0.3% lower at $91.20 a barrel, giving back a small part of its recent gains.
All three major U.S. stock indexes also ended the session lower in a broad sell-off ahead of the Fed’s interest rate announcement on Wednesday, which is expected to culminate in a decision to leave key interest rates unchanged.
“It’s a big set up coming into tomorrow and markets are clearly focused on any change in communication from the Federal Reserve,” said Bill Northey, senior investment director at U.S. Bank Wealth Management in Helena Montana, who expects “intense focus on the Fed’s perspective on inflation in the post-meeting press conference.”
“Broad inflation readings have shown marked progress over the last year,” Northey added. “But the last mile of inflation is likely going to be more challenging, bringing it back toward the Federal Reserve’s target of 2%.”
The Fed is also due to release its Summary Economic Projections, including its dot plot, which should provide a glimpse into the Federal Open Markets Committee’s forecast trajectory of interest rates, inflation and economic growth.
“What’s being priced into the market is a pause but increased risk that rates will stay higher for longer,” said Michael Green, chief strategist at Simplify Asset Management in Philadelphia. “If (the Fed) announced that they are removing rate cuts in 2024 by raising the dot plot, it would generally be seen as a very hawkish pause.”
Financial markets have priced in an all-but-certain 99% probability that the central bank will leave its key Fed funds target rate at 5.25%-5.00% on Wednesday, and a growing 70.9% likelihood of standing pat at its next meeting in November, according to CME’s FedWatch tool.
On the economic front, a bigger-than-expected plunge in U.S. housing starts on Tuesday helped feed investor uncertainty.
The languid IPO market continues to show signs of life, with grocery delivery app Instacart’s parent Maplebear Inc making its Nasdaq debut, days after chipmaker Arm Holdings’ stellar entry to the public marketplace last week.
Maplebear shares jumped 12.3%, while Arm Holdings lost 4.9%.
The Dow Jones Industrial Average fell 106.57 points, or 0.31%, to 34,517.73, the S&P 500 lost 9.58 points, or 0.22%, to 4,443.95 and the Nasdaq Composite dropped 32.05 points, or 0.23%, to 13,678.19.
Among the 11 major sectors of the S&P 500, nine ended the session red, with energy and consumer discretionary suffering the largest percentage declines.
Walt Disney slid after the company announced it would nearly double its capital expenditure for its parks business over the next 10 years.
Starbucks lost ground following TD Cowen’s decision to downgrade the coffee chain’s shares to “underperform.”
Automakers General Motors and Ford Motor Co advanced as the United Auto Workers union planned to announce more strikes on Friday if no serious progress is made in ongoing talks with automakers.
Declining issues outnumbered advancing ones on the NYSE by a 1.67-to-1 ratio; on Nasdaq, a 1.47-to-1 ratio favored decliners. The S&P 500 posted seven new 52-week highs and nine new lows; the Nasdaq Composite recorded 33 new highs and 257 new lows. Volume on U.S. exchanges was 9.60 billion shares, compared with the 10.05 billion average for the full session over the last 20 trading days.
Reuters, Globe staff