Canada’s main stock index fell to a near two-month low on Thursday, weighed by declines for financial and commodity-linked shares, as investors worried that the Federal Reserve would keep interest rates elevated for longer than previously expected.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 263.44 points, or 1.2%, at 21,698.11, its lowest closing level since April 17.
The Federal Reserve on Wednesday trimmed the number of rate cuts expected this year and raised the long-run “neutral” rate needed to keep inflation in check while maintaining steady growth.
The U.S. central bank is trying to communicate that “we’re going to revert back to a more normalized interest rate environment as opposed to the ‘la-la land’ we’ve been living in prior to the rate hikes,” said Michael Sprung, president at Sprung Investment, referring to the colloquial term for a dream world.
Interest rates had been at historically low levels in the years after the global financial crisis until major central banks began hiking aggressively in 2022 to tame inflation.
Higher interest rates reduce the value to investors of the expected cash flows that companies are expected to produce.
“The world has got to adjust to a more normalized valuation regime. It think it’s going to be a tough adjustment for people to make,” Sprung said.
Interest rate sensitive sectors such as utilities, real estate and financials account for 35% of the weighting on the Toronto market.
Financials fell 1.3% and energy was down 3.1%, with a decline of 3.8% for shares of Cenovus Energy Inc .
The materials group, which includes metal miners and fertilizer companies, lost 1.8% as gold and copper prices fell.
BlackBerry Ltd was among the biggest decliners, with shares of the software company falling 9.2% to its lowest in nearly three months.
Most U.S. stocks slipped Thursday, but hopes for coming cuts to interest rates and Wall Street’s continued frenzy around artificial-intelligence technology nudged indexes to more records.
The S&P 500 added 0.2% to its all-time high set the day before, even though the majority of stocks within it weakened. The Nasdaq composite climbed 0.3% from its own record, thanks to gains for technology stocks, while the Dow Jones Industrial Average fell 65 points, or 0.2%.
Treasury yields eased again in the bond market as conviction built that inflation is slowing enough to get the Federal Reserve to cut interest rates later this year.
The latest update on inflation showed prices paid at the wholesale level weren’t as bad as economists expected. Prices actually dropped from April into May, when economists were forecasting a rise.
It followed a surprising update from Wednesday that showed inflation at the consumer level was lower than expected. Federal Reserve Chair Jerome Powell called that report encouraging and said policymakers need more such data before lowering their main interest rate from the most punishing level in two decades.
“It’s a question of when they cut, not if,” said Niladri “Neel” Mukherjee, chief investment officer of TIAA Wealth Management.
High interest rates have been dragging on some parts of the economy, particularly manufacturing. A separate report on Thursday showed more U.S. workers filed for unemployment benefits last week than economists expected, though the number is still low relative to history.
The hope on Wall Street is that growth for the job market and economy continues to slow in order to take pressure off inflation, but not so much that it creates a deep recession.
Companies whose profits are most closely tied to the strength of the economy lagged the market Thursday following the reports, such as oil-and-gas producers and industrial companies.
Dave & Buster’s Entertainment sank 10.9% after reporting worse drops in profit and revenue for the latest quarter than analysts expected, citing a “complex macroeconomic environment” among other reasons. Other companies have recently been detailing a split among their customers, where lower-income households are struggling to keep up with still-high inflation.
Some companies have been able to skyrocket regardless of the pressures on the economy because of an ongoing frenzy around artificial-intelligence technology.
Broadcom jumped 12.3% after the semiconductor company reported stronger profit for the latest quarter than analysts expected, aided once again by AI demand. It also raised its forecast for revenue this year.
Broadcom’s stock price has jumped so high, to nearly $1,700, that it will soon give nine shares for every one that investors already hold in in order to lower the price and make it more affordable. It follows a similar move by Nvidia, which has become the poster child of the AI rush and seen its total market value top $3 trillion.
Tesla rose 2.9% after CEO Elon Musk said early voting results indicated shareholders were leaning toward approving his pay package. Without it, Musk had threatened to take AI research to one of his other companies.
All told, the S&P 500 rose 12.71 points to 5,433.74. The Dow slipped 65.11 to 38,647.10, and the Nasdaq rose 59.12 to 17,667.56.
In the bond market, the yield on the 10-year Treasury fell to 4.24% from 4.32% late Wednesday and from 4.60% late last month. The two-year yield, which moves more on expectations for the Fed, fell to 4.69% from 4.76%.
Most Fed officials are penciling in either one or two cuts to interest rates this year, and traders are hopeful they can begin as soon as September. Such cuts would ease the pressure on the economy and give a boost to all kinds of investment prices.
TIAA’s Mukherjee said he’s expecting the U.S. economy’s growth to keep slowing as spending by lower-income households weakens under the strain of dwindling savings accounts. But he expects the economy to avoid a recession as spending continues by well-off households benefiting from fatter investment portfolios and home values, as well as by governments and corporations.
“To me, the soft landing” for the economy where inflation eases without a deep recession “has already been achieved,” he said.
But he has muted expectations for stocks for the rest of the year after they’ve already gained so much. The S&P 500 has jumped nearly 14%. Plus, he points to the potential for shakiness in financial markets around upcoming elections, including the U.S. presidential face-off.
“I would be ready for more election surprises,” Mukherjee said. “I don’t know which one, but it looks like the world is full of surprises these days.”
European markets have gotten rocked after recent elections saw a surprising rise in support for the far right in places like France and Germany. Volatility also hit markets recently after investors learned the election results in other countries, such as Mexico and India.
European stocks fell sharply Thursday as leaders of the Group of Seven leading industrialized nations gathered in Italy. France’s CAC 40 fell 2%, and Germany’s DAX lost 2%.
In Asia, Japan’s Nikkei 225 slipped 0.4% ahead of a decision on interest rates by Japan’s central bank coming on Friday. Indexes rose in Seoul and Hong Kong.
- Reuters and The Associated Press
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