Wall Street lost ground on Thursday, ending a streak of all-time closing highs on concerns over developments in Afghanistan, while fears of a potential shift in U.S. Federal Reserve policy prompted a broad but shallow sell-off the day before the Jackson Hole Symposium. Canada’s TSX followed along, closing lower one day after reaching an all-time peak, with financials weighing on the index the most.
The S&P/TSX Composite Index closed down 83.17 points, or 0.40%, at 20,504.15, with financials dropping 0.92%. Sector performance otherwise was mixed and relatively unnoteworthy.
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce closed out Canadian lenders’ third-quarter results reporting with better-than-expected profits on Thursday, driven mostly by releases of reserves to cover bad loans, but CIBC’s strong loan growth from a year earlier eluded TD.
CIBC’s loan balances climbed 8% as of July 31, while TD’s fell 0.5% from a year earlier, as declines in the latter’s U.S. lending offset strong loan growth in Canada. This contributed to flat revenues at TD, while CIBC’s rose 7%.
TD shares closed down 2.39% while CIBC was down 2.09%.
Some market watchers suggested the better-than-expected quarterly earnings reported this week have been overshadowed by a promise by the ruling Liberal Party to raise corporate income taxes on financial firms if re-elected.
On Wednesday, the Liberals said they would hike the rate to 18% from 15% on all earnings over C$1 billion ($793 million) and impose a special dividend to be paid by the firms. The increases are designed to pay for the cost of the COVID-19 recovery.
The financial sector came off its intraday highs Wednesday after the Liberal announcement, but still ended about half a percentage point higher.
“Some digestion is occurring in the marketplace with what happened yesterday,” said Goodreid Investment Counsel Portfolio Manager Brian Madden.
“The market is taking (the announcement) and ... thinking about the severity and probability of it getting enacted into law,” he said. “It would clip the banks’ earnings very very significantly if it were enacted.”
National Bank of Canada financial analyst Gabriel Dechaine said in a note that the average bank’s earnings this year would have been 2% lower as a result of the proposed change, based on annualized fiscal 2021 results, amounting to a cumulative theoretical tax increase of C$1.3 billion ($1.02 billion) for the six biggest banks.
The proposed special dividend could amount to over C$1 billion a year over the next four years, he said.
Some of the decline in shares may also be due to investors who had bought ahead of the banks’ results taking profits, Madden said.
Meanwhile, all three major U.S. stock indexes ended the session in the red, with the S&P and the Nasdaq notching their first down day in six.
The sell-off firmed after hawkish commentary from Dallas Fed President Robert Kaplan and a blast outside the Kabul airport in Afghanistan helped strengthen the risk-off sentiment.
Kaplan, who is not currently a voting member of the Federal Open Markets Committee, said he believes the progress of economic recovery warrants tapering of the Fed’s asset purchases to commence in October or shortly thereafter.
Kaplan’s remarks followed earlier comments from the St. Louis Fed President James Bullard, who said that the central bank is “coalescing” around a plan to begin tapering process.
“(Kaplan’s statements) caused a little confusion about the taper timeline, but in my opinion the equity markets are focused on geopolitical issues,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors in Hunt Valley, Maryland. “There’s a flight to safety during geopolitical tensions.”
“I am surprised the market the market hasn’t fallen more, given the fear that it could take focus away from (U.S. President Joe Biden’s) domestic agenda,” Horneman added.
The economy grew at a slightly faster pace than originally reported in the second quarter, fully recovering its losses from the most abrupt downturn in U.S. history, according to the Commerce Department. But jobless claims, though still on a downward trajectory, ticked higher last week.
The data did little to move the needle with respect to expectations that the Fed is unlikely tip its hand regarding the taper timeline when Chairman Jerome Powell unmutes and delivers his speech at Friday’s virtual Jackson Hole Symposium.
“We’re going to see a lot of market participants analyze every word (Powell) uses, but at the end of the day, they will begin tapering,” Horneman said. “I’m more concerned about the speed at which they taper. What are they going to start with? That will give us a clearer indication as whether they’re getting more hawkish.”
The Dow Jones Industrial Average fell 192.38 points, or 0.54%, to 35,213.12, the S&P 500 lost 26.27 points, or 0.58%, to 4,469.92 and the Nasdaq Composite dropped 96.05 points, or 0.64%, to 14,945.81.
Of the 11 major sectors in the S&P 500, all but real estate ended the session lower, with energy stocks suffering the steepest percentage loss.
Declining issues outnumbered advancing ones on the NYSE by a 2.99-to-1 ratio; on Nasdaq, a 1.83-to-1 ratio favored decliners. The S&P 500 posted 31 new 52-week highs and two new lows; the Nasdaq Composite recorded 82 new highs and 39 new lows. Volume on U.S. exchanges was 8.27 billion shares, compared with the 8.96 billion average over the last 20 trading days.
Oil settled lower, snapping a three-day rally on renewed concerns over demand due to rising COVID-19 infections and as Mexico restored some output after a fire disrupted supplies.
Losses were limited by the potential for other supply interruptions. Energy companies prepared for the possibility of a severe storm hitting the U.S. Gulf Coast this weekend.
Brent crude settled down $1.18, or 1.6%, at $71.07 a barrel. U.S. West Texas Intermediate oil settled down 94 cents, or 1.4% at 67.42 a barrel.
Fresh COVID-19 outbreaks fueled by the Delta variant raised concerns about the strength of the economic recovery globally.
Oil was also weighed down by broader weakness in equity markets later in the day, analysts said.
Reuters, Globe staff
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