North American stock markets fall to start June on fears of rising interest rates

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This article was published 31/05/2022 (940 days ago), so information in it may no longer be current.

TORONTO – North American stock markets closed lower to start June amid rising interest rates and fears of persistently hot inflation.

The Bank of Canada adopted a more hawkish tone Wednesday as it raised interest rates by 50 basis points for a second time in two months and said it was “prepared to act more forcefully” as it forecasts higher consumer prices to come this year.

“Inflation is still very elevated and in some cases may be becoming a little bit more entrenched in the economy and will be possibly harder for central banks to fight,” said Mike Archibald, vice-president and portfolio manager with AGF Investments Inc.

The loonie responded to the Bank of Canada move by climbing to a near six-week high even as the U.S. dollar strengthened compared with other global currencies. The Canadian dollar traded for 79.12 cents US compared with 79.06 cents US on Tuesday.

The S&P/TSX composite index closed down 15.62 points to 20,713.72 after being up for most of the day.

In New York, the Dow Jones industrial average was down 176.89 points at 32,813.23. The S&P 500 index was down 30.92 points at 4,101.23, while the Nasdaq composite was down 86.93 points at 11,994.46.

U.S. stock markets dipped following a volatile May as positive economic data, including manufacturing numbers, indicated that its economy remains solid, which pushed up yields and reinforced expectations that the Fed will aggressively raise interest rates.

Archibald said stock markets interpreted good news as something like bad news in that it’s going to mean upward pressure on the pace of interest rate increases.

Markets also appeared to respond to comments from JPMorgan CEO Jamie Dimon who said the U.S. economy is headed for a “hurricane” amid the tightening of monetary policy.

The Toronto stock market outperformed its U.S. counterparts due to its composition that favours commodities, including oil, and has less of a presence in technology.

Energy was the best performer on the day, gaining 1.9 per cent on higher crude oil and natural gas prices as big Canadian producers saw share increases, led by Vermilion Energy Inc. which was up 4.9 per cent.

The July crude oil contract was up 59 cents at US$115.26 per barrel and the July natural gas contract was up 55.1 cents at US$8.70 per mmBTU.

Energy’s performance relative to the broader TSX has been a pretty good barometer for when inflation is going to peak, said Archibald. When energy stocks start to underperform the TSX in a rising inflationary cycle, that tends to suggest that inflation is at or near peak levels.

“We aren’t seeing that yet, so that would still give me the signal that the inflationary pressures that central banks are worried about are here for probably longer than people think,” he said in an interview.

Industrials was also positive as CAE Inc. increased 7.7 per cent after posting strong quarterly results. Shares of WSP Global Inc. rose five per cent after the engineering firm announced a US$1.8-billion acquisition of a Scottish environmental consulting business.

Health care was one of nine sectors that lost ground on the TSX. It fell 3.5 per cent as Aurora Cannabis Inc. shares lost 6.6 per cent.

Ten-year U.S. treasury bond yields rose to 2.92 per cent to put pressure on the technology sector, which was the second weakest sector Wednesday. It fell 2.1 per cent as Hut 8 Mining Corp. decreased 11.3 per cent, BlackBerry Ltd. was down 5.0 per cent and Shopify Inc. was 3.7 per cent lower.

Materials was also lower despite higher metals prices. The August gold contract was up 30 cents at US$1,848.70 an ounce and the July copper contract was up 3.3 cents at US$4.33 a pound.

Archibald expects markets will be choppy in June and beyond until we get closer to the end of central bank tightening.

“At that point in time some of the technology names and the growthier parts of the market might start to dig in and offer some good value for investors.”

This report by The Canadian Press was first published June 1, 2021.

Companies in this story: (TSX:VET, TSX:ACB, TSX:CAE, TSX:HUT, TSX:BB, TSX:SHOP, TSX:WSP, TSX:GSPTSE, TSX:CADUSD)