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A trader works on the floor of the New York Stock Exchange (NYSE) on June 13.BRENDAN MCDERMID/Reuters

Canada’s main stock market tumbled back into correction territory on Monday and the dollar weakened against its U.S. counterpart as investors raised bets on how high central banks would lift interest rates to tackle inflation.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 2.6% at 19,742.56, leaving it 10.6% below the record closing high it notched up in March.

A correction is confirmed when an index closes 10% below its record closing high. The TSX did that on May 11 and May 12 but then rallied.

The Canadian dollar was trading 0.8% lower at 1.2888 to the U.S. currency, or at 77.59 U.S. cents, as the safe-haven U.S. dollar climbed against a basket of major currencies. It touched its weakest since May 19 at 1.2893.

Wall Street’s benchmark S&P 500 also ended sharply lower after hot U.S. inflation data on Friday left investors nervous that the Federal Reserve would not be able to control price pressures without triggering a recession.

The S&P 500 ended more than 20% below its Jan. 3 record closing high on Monday, confirming a bear market for the benchmark.

A close of more than 20% below the record high confirms the index is in a bear market, according to a commonly used definition. It is the first time the S&P 500 has confirmed a bear market since the 2020 Wall Street plunge brought on by the COVID-19 pandemic.

The S&P 500 lost 149.91 points, or 3.85%, to end at 3,750.95 points, while the Nasdaq Composite lost 526.82 points, or 4.65%, to 10,813.20. The Dow Jones Industrial Average fell 857.70 points, or 2.73%, to 30,535.09.

The Fed is due to make an interest rate decision on Wednesday.

“The central banks are going out of their way to make it apparent that they are not afraid to raise interest rates perhaps more aggressively than people had been assuming up to now,” said Michael Sprung, president at Sprung Investment Management.

Money markets see about a 75% chance that the Bank of Canada would raise interest rates by three-quarters of a percentage point next month, which would be the biggest hike since August 1998, and expect rates to peak at about 3.9% next year.

Just two weeks ago, investors expected a so-called terminal rate of 3%.

“I think what we are beginning to see is maybe the beginning of some capitulation in the market,” Sprung said.

The Toronto market has fallen less than some other major benchmarks this year, helped by its heavy weighting in resource shares.

But the energy sector gave back some recent gains on Monday and fell 3.1%, while the materials group, which includes precious and base metal miners and fertilizer companies, tumbled 4.8% as gold and copper prices fell.

Technology shares, which are particularly sensitive to higher rates, lost 3.6%, with shares of cloud-based commerce platform company Lightspeed Commerce Inc down 14.4%.

Canadian bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year touched its highest since May 2010 at 3.551% before dipping to 3.514%, up 16.1 basis points on the day.

The figures unnerved investors and quashed bets that the Federal Reserve was gaining the upper hand in taming soaring prices.

“The Fed said it has got inflation under control. The Fed doesn’t have it under control, and they could have lost control,” said Ken Polcari, chief market strategist at SlateStone Wealth LLC in Florida.

“I don’t see panic selling yet, but it feels like it’s coming,” Polcari said, adding that a fall below 3,800 points in the S&P 500 index could spur more investors to flee equities.

An index of world stocks dropped 3.7%.

As speculation simmers that the Fed could hike interest rates by 75 basis points at its June 14-15 policy meeting this week, markets ratcheted up expectations that U.S. rates would peak at around 4% next year, up an eye-watering 100 basis points from less than two weeks ago.

Investors are trying to predict where benchmark policy rates could peak in the United States and other major economies, as that would help determine equity valuations and how much further share prices could fall.

European shares tumbled 2.4% to their lowest in more than three months, and the euro STOXX volatility index - an equivalent in Europe of the U.S. VIX index, also known as Wall Street’s fear gauge - surged to a one-month high. The U.S. Vix index also leapt to its highest in over a month.

Benchmarks in many countries including the Netherlands have suffered declines of more than 20% from a recent closing peak.

“This is happening in spite of the actions that have so far been taken by central banks..., stoking fears that they will have to go harder and faster if inflation is to be tamed, the cost of which is being increasingly seen as lower growth and potentially recession,” Equiti Capital chief macro strategist Stuart Cole said.

With inflationary trends showing no signs of abating and new mass COVID-19 testing in China sparking concerns about more crippling lockdowns and squeezed global supply chains, investors cut exposure to risky assets across the board.

Credit default swap spreads blew out to multi-year highs, while cryptocurrencies including Bitcoin and ether posted double-digit losses, as news that U.S. crytocurrency lending company Celsius Network had frozen withdrawals spooked investors.

European bonds were also caught in the broadening debt market selloff following a hawkish European Central Bank meeting last week, with two-year German bond yields galloping above 1% for the first time in more than a decade.

Rising U.S. yields and the flight to safety pushed the dollar index, which measures the value of the greenback against six major currencies, to a high last seen in December 2002. By late afternoon, the index was up 0.7% at 105.18.

Against the yen, the dollar retreated from Monday’s peak of 135.22 yen, a level not seen since October 1998, while the British pound sank 1.5% after data showed the UK economy unexpectedly shrank in April.

This is a big week for central banks with the Fed, Bank of England and Swiss National Bank holding policy meetings.

Expectations of even more aggressive rate hikes from central banks around the world have led investors to sour on the global growth outlook.

Multiple indicators of growth in markets slumped on Monday from technology shares in Hong Kong to the Australian dollar, as investors fled to the perceived safe haven of the U.S. dollar.

Investors in Asia focused on the risk of new coronavirus lockdowns, with Beijing’s most populous district of Chaoyang announcing three rounds of mass testing to quell a “ferocious” outbreak that emerged at a bar.

Chinese blue chips fell 1.17% and Hong Kong’s Hang Seng suffered a 3.39% slide. Japan’s Nikkei slumped 3.01% and South Korea’s Kospi shed 3.52%.

“Anyone trying to pick the bottom in China’s growth and equity markets on the basis that China was ‘one and done’ on lockdowns is naive,” said Jeffrey Halley, senior market analyst at OANDA.

China’s growth shares sagged, with tech giants listed in Hong Kong slumping 4.45%. Index heavyweights Alibaba , Tencent and Meituan were each down between 4% and 6%.

Leading cryptocurrency bitcoin sank 11.7% to the lowest since December 2020 at $23,462.

Meanwhile, crude oil prices whipsawed between gains and losses, as investors weighed the impact of tight global supplies on softening demand as the world economy cools. For the day, Brent crude futures settled up 0.21% at $122.27 a barrel.

Reuters

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