Markets hit as Fed fears grow

Share

Investors are growing nervous as signs of a strengthening U.S. economy add to fears that the Federal Reserve will reduce stimulus as early as next month.

Most global stock markets retreated on Thursday, recoiling from a mix of disappointing earnings forecasts, upbeat economic news and climbing bond yields.

Canada escaped the downdraft, but in New York the S&P 500 closed at 1,661.32, down 1.4 per cent, for its biggest one-day decline since June 20.

The retreat came as yields on the 10-year U.S. Treasury touched 2.8 per cent, the highest level in two years and a dramatic increase from just 1.63 per cent as recently as May.

The runup in bond yields raises concerns about the impact of higher interest rates on borrowing costs, consumer spending and corporate profitability. Yet, it also reflects growing confidence about the U.S. economy.

Many observers believe the Fed is eager to normalize its monetary policy now that signs of a stronger economy are emerging. They expect the central bank to start winding down its bond-buying program, known as quantitative easing or QE, next month, removing what had been a powerful boost to stock prices.

"As long as we see even moderate growth and minor progress on the jobless rate, [the Fed is] determined to bring QE to an end," said Avery Shenfeld, chief economist at CIBC World Markets.

"But they face the delicate task of doing so without prompting a spike in long-term rates that would undermine a still-fragile recovery that rests to a significant degree on housing, a sector sensitive to [long-term] rates."

On Thursday, the latest reading on the U.S. employment market from the Labour Department was a standout. Weekly jobless claims fell to a six-year low of 320,000.

Confidence levels among U.S. home builders in August rose for a fourth straight month to the highest level in nearly eight years, suggesting that the recovery in the housing market remains on track.

And in Europe, the euro zone economy grew 0.3 per cent in the second quarter, ending an 18-month contraction.

But two corporate behemoths, seen as bellwethers for their respective sectors, provided evidence that businesses are struggling to meet lofty expectations.

Cisco Systems Inc. said it expects earnings to grow just 3 per cent to 5 per cent in the current quarter, well below analysts' forecasts. The shares fell 7.2 per cent.

Wal-Mart Stores Inc. lowered its earnings forecast for the rest of the year, pointing to a tough environment for retailers. The shares lost 2.6 per cent.

Still, Thursday's turbulence looks minor next to the 146 per cent gains notched by the S&P 500 during the bull market since 2009, including a 17 per cent rally this year.

It fell nearly 6 per cent between May and June over similar concerns about Fed policy, only to recover to record highs after Fed chairman Ben Bernanke assured investors that the central bank's key interest rate would remain ultra-low.

Krishen Rangasamy, an economist at National Bank Financial, believes investors could be taking profits as they move away from the turbocharged U.S. market.

"The big story is the probable rotation away from the S&P 500, which has already posted decent gains this year, to markets that are perceived to be undervalued," he said.

"Europe and emerging markets are possible avenues for investors to place their cash."

Canada benefited from some sort of shift in investor attention on Thursday, sending the benchmark S&P/TSX composite index 0.5 per cent higher.

Gold stocks shot higher after the price of gold rose to $1,364.20 (U.S.) an ounce, up $30.20.

As well, telecom stocks rallied on a report that Verizon Communications Inc. is delaying its foray into Canada's wireless sector.

And Suncor Energy Inc. rose 3.5 per cent after Warren Buffett's Berkshire Hathaway Inc. disclosed that it had bought nearly 18 million shares in the Canadian energy company in the second quarter.