Canada’s main stock index fell to a near four-week low on Wednesday as Bank of Montreal reported disappointing results and investors worried borrowing costs - particularly in the U.S. - would remain elevated for longer than previously expected, slowing economic growth. Stocks on Wall Street also fell as Treasury yields climbed on yet another weak debt auction and cautious comments from Federal Reserve officials on the timing of the U.S. central bank’s easing cycle.
The S&P/TSX composite index ended down 367.07 points, or 1.65%, at 21,897.98, its lowest closing level since May 2 and its biggest decline since Feb. 13.
In afternoon trading, the benchmark U.S. 10-year yield was up 7.2 basis points to 4.613% after earlier hitting 4.638%, the highest level since May 1.
The move in U.S. Treasuries pressured Canadian yields higher, even though swaps markets continue to price in about 60% odds the Bank of Canada will cut interest rates next week. The Canada five-year bond yield, followed particularly closely because of its impact on fixed mortgage rates, rose to as high as 3.848% - coming within a mere 6 basis points of hitting fresh highs of the year.
“With rates staying higher that brings along the possibility of a slowing economy,” Michael Sprung, president at Sprung Investment Management. “We could possibly be in for a rough ride over the next number of months.”
Minneapolis Fed President Neel Kashkari said in an interview with CNBC late on Tuesday that the U.S. central bank should wait for significant progress on inflation before cutting interest rates. He added that the Fed could potentially even raise rates if inflation fails to come down further.
His comments, which had pushed yields higher, echoed remarks from other Fed officials, including Governor Christopher Waller.
Meanwhile, the sale of $44 billion in U.S. seven-year debt Wednesday resulted in a high yield of 4.65%, higher than the expected rate at the bid deadline, suggesting that investors sought a premium to purchase the note. The bid-to-cover ratio, a measure of demand was 2.43, lower than last month’s 2.48 and the average of 2.55. The seven-year note sale, which followed equally lackluster auctions of U.S. two-year and five-year notes on Tuesday, raised concerns about future demand for government debt.
All ten major sectors on the Toronto market lost ground, including a decline of 2.39% for heavily-weighted financial .
Bank of Montreal reported weaker-than-expected quarterly profit, hurt by higher loan loss provisions. Its shares ended down 8.86%.
“The banks seem to be taking larger-than-expected provisions for bad loans,” Sprung said. “From their point of view, they’re being cautious, from the investors’ point of view, it looks like the banks think it’s going to be worse than we had hoped.”
The TSX materials sector lost 2.15% as gold and copper prices fell.
The price of oil also decreased, settling 0.8% lower at US$79.23 a barrel. That weighed on energy, with the sector ending down 1.73%.
The utilities group, which includes many high-dividend paying stocks that could particularly benefit from interest rate cuts, was down 2.34%.
National Bank of Canada was a bright spot. Its shares gained 2.55% after the lender reported a rise in second-quarter net profit, helped by strong performance in its wealth management and financial markets units.
In the U.S., the Dow fell more than 1% and hit its lowest level in nearly a month. All of the S&P 500 sectors ended lower as well, with rate-sensitive utilities among sectors with the biggest declines.
Stocks held their losses following the release of the Beige Book, a U.S. Fed survey. It showed U.S. economic activity continued to expand from early April through mid-May, but firms grew more pessimistic about the future while inflation increased at a modest pace.
Conflicting expectations on the size and the timing of potential interest rate cuts have kept the market on edge since the start of this year.
Sticky inflation and hawkish comments from central bankers have forced traders to temper down rate cut expectations to only one by November or December, per the CME FedWatch Tool, from multiple cuts expected at the start of the year.
The main focus this week will be on Friday’s release of April’s Personal Consumption Expenditure data - the Fed’s preferred inflation gauge.
The S&P 500 lost 39.09 points, or 0.74%, to 5,266.95 while the Nasdaq Composite lost 99.30 points, or 0.58%, to 16,920.58. The Dow Jones Industrial Average fell 411.32 points, or 1.06%, to 38,441.54.
The Nasdaq retreated after closing above the 17,000 mark for the first time on Tuesday, while the small-caps Russell 2000 index fell 1.5%.
After the closing bell, shares of Salesforce were down more than 15% as the company reported results and forecast second quarter revenue below estimates. Salesforce shares ended the regular session up 0.7%.
During the regular session, shares of Marathon Oil advanced 8.4% after ConocoPhillips said it would buy the company in an all-stock deal for a little over its $15 billion market value. ConocoPhillips fell 3.1%. The energy sector dropped 1.8%.
Airline stocks declined, led by American Airlines, which declined 13.5% after the company cut its second-quarter profit forecast.
Dick’s Sporting Goods rose 15.9% after lifting forecasts for annual sales and profit, while Abercrombie & Fitch shot up 24.3% on raised annual sales growth forecast.
On the Nasdaq, declining issues outnumbered advancers by a 2.78-to-1 ratio and a 5.25-to-1 ratio on the NYSE. The S&P 500 posted 7 new 52-week highs and 16 new lows while the Nasdaq Composite recorded 45 new highs and 149 new lows. Volume on U.S. exchanges was 12.24 billion shares, compared with the 12.38 billion average for the full session over the last 20 trading days.
Reuters, Globe staff
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