U.S. and Canadian stocks closed lower on Tuesday, pressured by rising Treasury yields as investors assessed prospects for the Federal Reserve’s interest rate path.
While all three main U.S. stock indexes and Canada’s TSX had logged gains in the previous week on hopes for less hawkish central banks, that sentiment faded somewhat by Monday.
U.S. Treasury yields rose after economic data showed resilience and Fed Governor Christopher Waller said it suggests that the central bank need not change rates any time soon. The U.S. 10-year yield, a global benchmark for borrowing costs, rose 8.9 basis points at 4.262%. Canadian bond yields were also sharply higher.
“Part of the reason stocks are struggling to make headway is that interest rates are continuing to rise and provide a good alternative to stocks,” said Paul Nolte, market strategist, Murphy & Sylvest Wealth Management, Elmhurst, Illinois.
With U.S. crude oil prices rising on Tuesday, Nolte also cited recent strength in oil prices as a damper to the Fed’s efforts to push inflation back to 2%.
“Everybody has been expecting the Fed to step aside or start cutting rates. That might not be the case,” he said.
Traders’ bets that the Fed will leave rates unchanged at its September policy meeting stood at 93%, while they priced in a roughly 54% chance of a pause in November, the CME Group’s FedWatch tool showed. The Bank of Canada is widely expected to announce no change to its trend-setting overnight interest rate on Wednesday.
Along with light trading volume a day after Monday’s Labour Day holiday, Sam Stovall, chief investment strategist at CFRA Research, also noted that the Fed will have to look at upcoming data such as August’s inflation readings before making a rate decision later this month.
“The market’s not sure which way it wants to turn,” he said.
Data on Tuesday showed orders for U.S. factory goods declined 2.1% in July, ending a four-month streak of gains. But economists were looking for an even bigger decline.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 131.6 points, or 0.6%, at 20,413.76, after posting on Friday its highest closing level since July 31.
After markets closed, attention quickly turned to news that Enbridge Inc is planning a C$4-billion bought-deal offering of common shares as it announced an agreement to buy three natural gas utilities from Dominion Energy Inc. for US$9.4 billion.
The deal will create North America’s largest natural gas utility platform but will also involve Enbridge issuing 89.4 million common shares at C$44.70 each. Enbridge shares closed in Toronto at C$48.16. U.S-listed Enbridge shares were down 7% in the post market.
In regular trading, the TSX materials sector lost 1.9% as gold and copper prices fell.
“Gold prices are tumbling as the bond market selloff resumes,” Edward Moya, a senior market analyst at OANDA, said in a note. “Wall Street is looking at a U.S. economy that doesn’t look like it is ready to break and that will force the Fed (Federal Reserve) into reiterating that rates will have to stay higher for longer.”
Higher-for-longer interest rates will be supportive for the U.S. dollar, which is bearish for gold as the commodity is priced in the currency.
Meanwhile, China’s services activity expanded at the slowest pace in eight months in August as weak demand continued to dog the world’s second-largest economy and stimulus failed to meaningfully revive consumption.
The industrials sector fell 0.6% and heavily weighted financials were down 0.7%.
Energy was a bright spot, rising 0.6%, as oil settled 1.3% higher at $86.69 a barrel after Saudi Arabia and Russia announced a fresh extension to their voluntary supply cuts.
The Dow Jones Industrial Average fell 195.74 points, or 0.56%, to 34,641.97, the S&P 500 lost 18.94 points, or 0.42%, at 4,496.83 and the Nasdaq Composite dropped 10.86 points, or 0.08%, to 14,020.95.
Among the S&P’s 11 major sectors, energy was the biggest gainer, closing up 0.5% after hitting a roughly seven-month high.
The economically sensitive materials sector and industrials were weak throughout the session with respective declines of 1.8% and 1.7%. Interest rate sensitive utilities lost 1.5% as the day’s third weakest S&P sector.
The Dow Jones Transport index finished off 2.2%, weighed down by a slide in airline stocks as rising oil prices implied higher fuel costs. The S&P 1500 airlines index finished down 2.4%.
United Airlines closed off 2.5% after falling as much as 4.7% earlier in the day with a system-wide information technology issue forcing an hour-long aircraft ground stop.
Shares of Airbnb rallied 7% while Blackstone added 3.6% on news that their stocks would join the S&P 500 index. Oracle shares rose 2.5% after Barclays upgraded the software company to “overweight” from “equal weight.”
Declining issues outnumbered advancers on the NYSE by a 3.31-to-1 ratio; on Nasdaq, a 2.28-to-1 ratio favored decliners. The S&P 500 posted 12 new 52-week highs and 25 new lows; the Nasdaq Composite recorded 50 new highs and 142 new lows. On U.S. exchanges, 9.54 billion shares changed hands compared with the 10.26 billion moving average for the last 20 sessions.
Reuters, Globe staff