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The U.S. stock market closed out the first quarter on a down note Thursday with its biggest quarterly decline in two years, as concerns persisted about the continuing conflict in Ukraine and its inflationary effect on prices and the Federal Reserve’s response.

The TSX also closed lower on Thursday, with heavyweight energy, financials and materials sectors all in the red. But the Canadian market outperformed many global peers by notching a gain for the first quarter of the year.

While optimism about a possible peace deal between Ukraine and Russia helped lift stocks earlier in the week, hopes quickly evaporated and Russia’s President Vladimir Putin threatened on Thursday to halt contracts supplying Europe with a third of its gas unless they are paid in rubles as Ukraine prepared for more attacks.

The United States imposed new Russia-related sanctions, and U.S. President Joe Biden launched the largest release ever from the country’s emergency oil reserve and challenged oil companies to drill more in a bid to lower gasoline prices that have soared during the war in Ukraine.

Stock prices have been sensitive to any signs of progress toward a peace pact between Russia and Ukraine. Already-high U.S. inflation has intensified with surging commodity prices such as oil and metals since the war began.

As prices increase, the Fed becomes increasingly likely to become more aggressive in raising interest rates to combat inflation, potentially curbing economic growth.

Data on Thursday showed consumer prices barely rose in February as pricing pressures intensified, while personal consumption expenditures (PCE) excluding food and energy rose by 0.4%, in line with expectations.

“The PCE number came out today, which is the Fed’s preferred number, and although that was right on target, it was higher than it was last month, and the sense is it is going to continue to go higher, therefore you are seeing some weakness,” said Ken Polcari, managing partner at Kace Capital Advisors in Boca Raton, Florida.

“That only solidifies (Fed Chair) Jay Powell and the Fed’s position to be more aggressive so there are going to be multiple 50 basis point hikes.”

The S&P/TSX composite index ended down 185.80 points, or 0.84%, at 21,890.16, pulling back from a record high earlier in the day at 22,181.75.

For the month, the TSX was up 3.6%, its biggest advance since October, while it has gained 3.1% since the start of the year.

It was one of few major global benchmarks not to lose ground in a volatile quarter for financial markets.

“Canada is relevant again because we’re an inflation hedge,” said Bill Harris, a portfolio manager at Avenue Investment Management.

The TSX has a 27% weighting in energy and materials, indicating that the earnings of a large chunk of the market are directly tied to rising commodity prices. Oil and other commodity prices have soared after Western sanctions on Russia disrupted supplies.

The energy group is trying to figure out where the price of oil is going to settle down over the longer term to forecast cash flows, Harris said, adding “we’ve raised it probably about $20 across the course of the quarter.”

The TSX energy group fell 0.8% on Thursday. Still, the sector has advanced 36.2% since the start of the year, while the materials group, which includes precious and base metals miners and fertilizer companies, has gained 19.7%.

The Dow Jones Industrial Average fell 550.46 points, or 1.56%, to 34,678.35, the S&P 500 lost 72.04 points, or 1.57%, to 4,530.41 and the Nasdaq Composite dropped 221.76 points, or 1.54%, to 14,220.52.

While the S&P did suffer the worst quarter since the COVID-19 pandemic was in full swing in the United States in 2020, stocks have rebounded somewhat in March.

For the quarter, the S&P 500 fell 4.9%, the Dow lost 4.6% and the Nasdaq declined 9.1%, but for the month the S&P 500 rose 3.6%, the Dow gained 2.3% and the Nasdaq advanced 3.4%.

Investors will look toward Friday’s jobs report for more confirmation of labor market strength and insight into the possible path of monetary policy by the U.S. central bank.

All of the 11 major S&P sectors were lower, with financials and communication services among the weakest during the session.

Energy, easily the best performing sector so far this year with a gain of about 38%, slipped as oil prices dropped on Biden’s announcement while OPEC+ stuck to its existing output deal.

U.S. West Texas Intermediate futures for May delivery settled down $7.54, or 7%, at $100.28 a barrel, after touching a low of $99.66.

“This is a market where every barrel counts and (the SPR release) is a significant volume of oil to be put on the market for an extended period of time,” said John Kilduff, a partner at Again Capital LLC.

Biden’s 180 million-barrel release is equivalent to about two days of global demand, and marks the third time Washington has tapped the SPR in the past six months.

Other members of the International Energy Agency may also release barrels to offset lost Russian exports after that nation was hit with heavy sanctions for its invasion of Ukraine.

IEA member countries are set to meet on Friday at 1200 GMT to decide on a potential collective oil release, a spokesperson for New Zealand’s energy minister said.

However, any SPR release could also be a sign that Washington does not expect a quick resolution to the crisis in Ukraine, which has squeezed oil supplies, said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

“Desperate times clearly call for desperate measures and clearly the Biden administration believes the spike in oil prices warrants this move to eat into the country’s emergency supplies,” Streeter said.

Goldman Sachs analysts said the move would help the oil market to rebalance in 2022 but was not a permanent fix.

“This would remain, however, a release of oil inventories, not a persistent source of supply for coming years. Such a release would therefore not resolve the structural supply deficit, years in the making,” they said.

In credit markets, benchmark U.S. 10-year bond yields fell to 2.33% and are down from 2.56% on Monday, which was the highest since May 2019.

Canadian government bond yields eased across the curve, tracking the move in U.S. Treasuries. The 10-year dipped 4.1 basis points to 2.396%, after touching on Tuesday its highest level in more than three years at 2.607%.

The closely watched U.S. yield curve between two-year and 10-year notes was around 4 basis points, after briefly inverting on Tuesday.

An inversion in this part of the curve is viewed as a reliable signal that a recession may follow in one to two years. Some analysts say, however, that the signal has been distorted by the Federal Reserve’s massive bond purchases.

The curve has been flattening as growth concerns and demand for duration holds down longer-dated yields relative to shorter-dated ones, which have been surging on expectations that the Fed will need to aggressively hike interest rates to stem the fastest inflation in 40 years.

March jobs data due on Friday will be closely evaluated for wage inflation, in addition to the headline jobs figure.

Employers are expected to have added 490,000 jobs last month, according to the median estimate of economists polled by Reuters. Average hourly earnings are expected to have risen by 0.4% on the month, and 5.5% on the year.

Volume on U.S. exchanges Thursday was 12.08 billion shares, compared with the 13.9 billion-share average for the full session over the last 20 trading days. Declining issues outnumbered advancing ones on the NYSE by a 1.61-to-1 ratio; on Nasdaq, a 1.74-to-1 ratio favored decliners. The S&P 500 posted 53 new 52-week highs and eight new lows; the Nasdaq Composite recorded 57 new highs and 103 new lows.

Reuters, Globe staff

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