Lower crude oil prices and a further dip in bond yields hurt two of the bigger sectors on Canada’s main stock index and sent it slightly lower midweek.
The S&P/TSX composite index closed down 9.43 points to 20,290.60 despite hitting a record intraday high in earlier trading. The energy sector took the biggest bruising, losing 2.18%. Financials, which generally benefit when bond yields and interest rates rise, lost 0.22%.
U.S. stocks, however, ended higher after minutes from the last Federal Reserve meeting showed officials were divided on economic signals.
According to minutes of the U.S. central bank’s June policy meeting, Fed officials felt substantial further progress on the economic recovery “was generally seen as not having yet been met,” but agreed they should be poised to act if inflation or other risks materialized.
“I read this as effectively a dovish set of notes simply because they don’t feel as a group that they have enough certainty around the situation to make any changes at all,” said Brad McMillan, chief investment officer at Commonwealth Financial Network in Waltham, Massachusetts.
Wall Street has been concerned about inflation, with investors moving between economy-linked value stocks and growth names in the past few sessions.
Unofficially, the Dow Jones Industrial Average rose 104.42 points, or 0.3%, to 34,681.79, the S&P 500 gained 14.81 points, or 0.34%, to 4,358.35 and the Nasdaq Composite added 1.42 points, or 0.01%, to 14,665.06.
U.S. Treasury yields continued on their downward trajectory, with 10-year yields seeing a seventh straight session of declines on worries the economic recovery may be softening while investors assessed the minutes from the Federal Reserve’s June meeting for clues to its policy path. Canadian bond yields continue to take a similar path.
The streak of declines for the 10-year note is the longest since a nine-session drop that ended on March 3, 2020, as the COVID-19 pandemic in the U.S. was gaining speed.
Recent data on the labor market and services sector has given investors pause that the economy may not be strengthening as initially anticipated and some underlying weakness may be emerging.
On Wednesday, the Labor Department said job openings edged up in May while hiring dipped, indicating the economy continues to struggle with labor shortages.
Analysts also pointed to volatility in the oil market, where crude had a run-up in price until faltering on Tuesday after OPEC producers canceled a meeting, and worries about the spread of the Delta variant of the coronavirus contributed to the risk-off environment. Also cited for the decline were a market that had been largely positioned short and a break on Tuesday of technical support levels on the 10-year.
“It’s a little bit of all of those from short squeeze, Delta variants, lack of supply, asset liability and historical tapering meaning lower yields,” said Eric Souza, senior portfolio manager at SVB Asset Management.
The yield on 10-year Treasury notes was down 4.9 basis points to 1.321% after earlier falling as low as 1.296%, the lowest level since Feb. 19.
“We broke 1.3% twice this morning at a couple of levels. When it hit those levels it bounced. ... Holding at this 1.30 handle is a bet the markets are probably going to want to see,” said Souza.
Read more: Reflation rethink sends bond markets into a spin
Oil prices fell more than $1 a barrel in another seesaw trading session, as investors feared this week’s collapse in OPEC+ talks could mean more supply, not less, is on the way.
Crude markets have been volatile over the last two days following the breakdown of discussions between major oil producers Saudi Arabia and United Arab Emirates, signaling investors are unclear on what the OPEC+ standoff means for worldwide production.
Brent crude settled at $73.43 a barrel, falling $1.10, or 1.5%. U.S. West Texas Intermediate settled at $72.20 a barrel, shedding $1.17 or 1.6%. Both benchmarks rallied more than $1 a barrel earlier in the session, similar to Tuesday’s action.
The Organization of the Petroleum Exporting Countries and its allies including Russia, known as OPEC+, have restrained supply for more than a year since demand crashed during the coronavirus pandemic.
The group is still maintaining nearly 6 million bpd of output cuts. It was expected to add to supply, but three days of meetings failed to close divisions between the Saudis and the Emiratis.
For now, the existing agreement - which keeps supply restrained more - remains in force. But the breakdown also could lead producers, eager to capitalize on the rebound in demand, to start supplying more oil.
“Some people are fearing a production war, but I think most people think that’s unlikely,” said Phil Flynn, senior analyst at Price Futures Group in Chicago. “It is possible the UAE could leave OPEC and just do it’s own thing, and if that happens, then it would be a question of competition for market share.”
Russia is now leading efforts to close divisions between the Saudis and UAE to help strike a deal to raise oil output in coming months, three OPEC+ sources said.
The August gold contract was up US$7.90 at US$1,802.10 an ounce and the September copper contract was up 7.2 cents at US$4.32 a pound.
Reuters, The Canadian Press, Globe staff
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