Canada’s largest stock index suffered another day of triple-digit losses on Monday, as U.S. markets also suffered a sharp pullback amid lingering inflation fears.
The S&P/TSX Composite Index lost 136.46 points to 19,974.92. The riskiest sectors were the hardest hit, with the S&P/TSX Cannabis-Heavy Capped Healthcare Index down 3.10% on the day, and the Consumer Discretionary and Technology sectors also fell by more than 1.5%.
“There really was nowhere to hide today,” said Allan Small, senior investment advisor at IA Private Wealth. “It was a general decline.”
In New York, the Dow Jones industrial average fell 643.13 points to 33,063.61. The S&P 500 index fell 90.49 points to 4,137.99, while the Nasdaq composite fell 323.65 points to 12,381.57.
Stock markets took a sharp negative turn late last week, posting a solid five-week run of gains. North American investors had seemed to gain confidence this summer that the interest rate hikes already announced by central bankers would be enough to bring inflation under control and that more aggressive rate hikes would not be necessary. This optimism, in turn, helped markets recover to recoup much of the losses suffered during the June bear market.
Last week, however, that sentiment seemed to reverse. Markets are once again nervous about the prospect of ever-higher interest rate hikes and their potential impact on the economy, Small said.
“Overall, we’re back on Fed watch,” he said, adding that all eyes will be on Friday’s U.S. Federal Reserve meeting in Jackson Hole, Wyo. to see if Chairman Jerome Powell makes any comments that might indicate what the central intends to do to combat inflation that remains stubbornly high, well above its target.
“A lot of (investors) are anticipating higher interest rates and more rate increases to come, and I think that’s what’s really causing the disaster today.”
With a lack of other information to go on, given the lack of major economic data releases expected this week, Wall Street pundits are likely to “analyze every word,” Powell said on Friday hoping to glean some insight from the mind of the coming Fed Chairman. of the central bank’s next scheduled interest rate announcement in September, Small said.
“And unfortunately, I don’t think that’s something investors can really prepare for or invest in, because we don’t know what he’s going to say,” he added.
Traders fear that aggressive measures to slow the economy could go too far and cause a recession. The US economy has already contracted in the first half of 2022, and there has been grim economic news from China and the UK in recent days.
Fears about the overall health of the global economy and the impact a prolonged recession could have on oil demand pushed crude prices lower again on Monday. The October crude contract was down eight cents at US$90.36 a barrel.
The energy supply crisis in Europe and fears over natural gas supply on that continent heading into fall and winter continue to drive up natural gas prices. The September natural gas contract on U.S. benchmark Henry Hub rose 34 cents to US$9.68 per mmBTU.
While corporate earnings for the second quarter have so far been better than expected, Small said investors know the full impact of inflation and recent interest rate hikes won’t be felt until the next quarter. There too, it is a source of apprehension.
Bond yields have also gained ground in recent days, with the yield on the 10-year US Treasuries now above 3% and that on the benchmark 3-year Government of Canada bond also above 3%.
Although August and September tend to be weaker months for equities in general, Small said it’s clear investors are currently worried about the prospect of future interest rate hikes. and whether continued aggressive action by the US Fed and Bank of Canada could lead to a prolonged recession.
“This whole prospect is just wreaking havoc on the markets,” he said.
The Canadian dollar was trading at 76.72 cents US against 76.98 cents US on Friday.
The December gold contract was down US$14.50 at US$1,748.40 an ounce and the September copper contract was down one cent at US$3.65 a pound. .
This report from The Canadian Press was first published on August 22, 2022