Canada’s benchmark equities index on Monday suffered its biggest percentage pullback since Jan. 21, as a dive in oil prices sent the energy sector deep into the red and a drop in many other commodity prices spurred selling in materials stocks.
The S&P/TSX Composite Index ended down 281.05 points, or 1.3%, at 21,180.78, its lowest closing level in nearly two weeks. U.S. crude oil futures settled 5.8% lower at US$103.01 a barrel amid hopes for progress toward a diplomatic end to Russia’s invasion of Ukraine - a development that would boost global supplies - while a pandemic-linked travel ban in China cast doubt on demand.
Wall Street also saw selling pressure, led by a drop in the Nasdaq, as investors sold tech and big growth names ahead of this week’s Federal Reserve meeting and an expected hike in interest rates.
Canadian and U.S. bond yields spiked, with the U.S. 10-year Treasury yield hitting its highest level in two-and-a-half years, at 2.144%. Canada’s 10-year government bond yield rose to 2.168% and the Canadian five-year bond yield - widely followed because of its influence on fixed mortgages - rose to 1.956%, up 21 basis points. Both were the highest levels since the end of 2018.
Investors expect the U.S. central bank to hike rates more aggressively this year, after data on Thursday showed that annual inflation in February rose at the fastest pace in 40 years, forcing Americans to dig deeper to pay for rent, food and gasoline.
The market “is focusing more on domestic fundamentals after last week’s CPI print and is penciling in more and more rate hikes,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
U.S. consumers upped their outlook for where inflation will be a year from now and in three years time, and they expect to spend substantially more on food, gas and rent in the next 12 months, according to a survey released on Monday by the New York Federal Reserve.
Fed funds futures traders are pricing for the Fed’s benchmark overnight interest rate to be 1.83% by its December meeting, up from 1.75% on Friday, and compared to 0.08% today.
Investors will be looking for more clarity from the Fed at the conclusion of its two day meeting on how many rate hikes are likely this year, and whether concerns about rate hikes denting the economy may override inflation fears.
“Our expectation is that it is a hawkish hike,” said Goldberg.
“Yes, they are certainly concerned about the geopolitical risks, but on the domestic side they are very worried about higher inflation and they do see growth as being solid enough that they can continue to push rates higher.”
Fed officials will update their rate forecasts and economic projections for the first time since Dec. Investors will also be looking for any details on the size and timing of when the Fed will begin shrinking its US$8.9 trillion balance sheet.
The Toronto market’s energy group fell 4.5%, while the materials group, which includes precious and base metals miners and fertilizer companies, lost 3.1 percent. Copper prices fell 2.5% and gold was down 1.7% at about US$1,951 per ounce.
Investors have been embracing Canada’s commodity-linked stock market to protect their portfolios from the impact of supply shortages and soaring inflation, with both the energy and materials groups notching multi-year highs in recent days.
Technology shares were also a drag in Toronto, falling 2%, as bond yields climbed ahead of the expected start of an interest rate hiking cycle by the Federal Reserve on Wednesday. Higher interest rates reduce the value to investors of the future cash flows that the companies in technology and other high growth sectors are expected to produce.
On Wall Street, the Dow ended flat, with financial and healthcare shares giving the index some support.
Developments in the Ukraine-Russia conflict added to investor caution as Russian and Ukrainian delegations held a fourth round of talks on Monday, but no progress was announced, while Russian forces allowed a first convoy of cars to escape Ukraine’s besieged port of Mariupol.
Apple Inc shares fell 2.7% and weighed the most on the S&P 500 and Nasdaq after its supplier Hon Hai Precision Industry Co Ltd, known as Foxconn, suspended operations in China’s Shenzhen amid rising COVID-19 cases.
“We’re seeing that rotation into value and away from growth, and a lot of that is tied to what’s happening to interest rates,” said Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago.
“Equity markets are going to be challenged going forward, and today is yet another example of that.”
The technology sector and consumer discretionary were the biggest drags on the S&P 500. Higher interest rates are a negative for tech and growth stocks because their valuations rely more heavily on future cash flows.
The Dow Jones Industrial Average rose 1.05 points to 32,945.24, the S&P 500 lost 31.2 points, or 0.74%, to 4,173.11 and the Nasdaq Composite dropped 262.59 points, or 2.04%, to 12,581.22.
The Russell 2000 index of small capitalization stocks fell 1.9% and was down more than 20% from its November record closing high. The Cboe volatility index, also known as Wall Street’s fear gauge, rose.
The S&P financial index rose 1.3%, finding inspiration from the higher bond yields. The health-care sector advanced 0.7%, with UnitedHealth Group up 1%. Energy slid 2.9%.
Declining issues outnumbered advancing ones on the NYSE by a 3.05-to-1 ratio; on Nasdaq, a 2.97-to-1 ratio favored decliners. The S&P 500 posted 11 new 52-week highs and 32 new lows; the Nasdaq Composite recorded 26 new highs and 615 new lows. Volume on U.S. exchanges was 14.26 billion shares, compared with the 13.7 billion average for the full session over the last 20 trading days.
Globe staff, Reuters
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