At the open: TSX rebounds after dropping into correction territory in Monday’s rout (June 14, 2022)
U.S. Treasury yields held near multi-year highs on Tuesday, while stock markets reeled from the previous session’s rout on signs that central banks’ action to curb inflation would tip the world economy into recession.
Canada’s main stock index opened higher, a day after tumbling back into correction territory, helped by gains in energy shares on the back of higher crude prices.
At 9:31 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was up 92.96 points, or 0.47%, at 19,835.52.
On Monday, the index tumbled back into correction territory, ending down 2.6% at 19,742.56, leaving it 10.6% below the record closing high it notched up in March.
A correction is confirmed when an index closes 10% below its record closing high. The TSX did that on May 11 and May 12 but then rallied.
Money markets see about a 75% chance that the Bank of Canada would raise interest rates by three-quarters of a percentage point next month, which would be the biggest hike since August 1998, and expect rates to peak at about 3.9% next year.
Just two weeks ago, investors expected a so-called terminal rate of 3%.
Wall Street’s main indexes also opened higher on Tuesday, a day after the S&P 500 confirmed it was in a bear market, as investors took relief from a smaller-than-expected rise in core producer prices.
The Dow Jones Industrial Average rose 75.60 points, or 0.25%, at the open to 30,592.34.
The S&P 500 opened higher by 13.89 points, or 0.37%, at 3,763.52, while the Nasdaq Composite gained 88.20 points, or 0.82%, to 10,897.43 at the opening bell.
The benchmark S&P 500 on Monday closed 20% below its all-time closing high hit on Jan. 3, while a key part of the Treasury yield curve inverted for the first time since April on mounting fears that the Federal Reserve’s attempts to control soaring inflation will dent the economy.
The selling pressure appeared to ease in early trading. Market heavyweights such as Apple Inc, Amazon, Microsoft Corp and Tesla rose between 0.7% and 0.9%.
Oracle Corp was another gainer after posting upbeat quarterly results on demand for its cloud products. Its shares jumped 12.1%.
U.S. delivery firm FedEx Corp on Tuesday raised its quarterly dividend by more than 50% to $1.15 per share, sending its shares 10.9% higher in early trading.
“There may be opportunity for a bit of a breather from the aggressive expectations baked in, and you can see that in terms of how the markets are wandering today,” said Edward Park, chief investment officer at Brooks Macdonald Asset Management in London.
“Markets are undoubtedly going to be choppy.”
Expectations are growing that central banks, especially the U.S. Federal Reserve, may have to up the pace of policy-tightening to stamp on inflation, potentially sparking economic recession. Markets now see the Fed’s rate hike cycle peaking around 4%, rather than the 3% seen last month.
Those expectations lifted U.S. 10-year borrowing costs, the benchmark interest rate for the global economy, as high as 3.44% on Monday, a 2011 peak.
While yields slipped on Tuesday to around 3.3% they remain some 180 basis points (bps) above end-2021 levels.
With the Fed due to start a two-day meeting later on Tuesday, markets waited to see if it could raise rates by a bigger-than-expected 75 bps, a possibility flagged by several investment banks, including Goldman Sachs.
That move, which would be the biggest increase since 1994, is also almost fully priced for Wednesday.
That repricing has pummelled assets that benefited from rock-bottom interest rates – stocks, crypto, junk-rated bonds and emerging markets.
“Quite simply, when we see monetary tightening the order of what we are seeing globally, something is going to break,” said Timothy Graf, head of EMEA macro strategy at State Street.
“Stock markets are reflecting the reality of the first-order effect of tighter financial conditions,” Graf said, predicting that with U.S. stock valuations still above COVID-time lows, there was more pain to come.
“I think there are other shoes to drop,” he added.
MSCI’s index of global shares slipped 0.3%, extending Monday’s 3.7% fall, while a pan-European equity index slumped 1% to March 2020 lows.
Asian shares too fell 1%, catching up with Monday’s bleak Wall Street session, when the S&P 500 and the Nasdaq indexes lost 4% and 4.7% respectively.
There was little let-up for crypto markets, where bitcoin and ether plumbed new 18-month lows, reacting to interest rate expectations and crypto lender Celsius Network’s decision to freeze withdrawals.
Bitcoin which fell as low as $20,816, is down more than 50% this year.
World markets latest lurch lower was triggered on Friday by U.S. data showing annual inflation to May shot up by 8.6%.
The ensuing bond sell-off lifted two-year U.S. yields more than 50 basis points over two sessions, pushing them above 10-year borrowing costs on Monday in the so-called curve inversion that is considered a harbinger of recession.
Two-year yields eased to 3.3% on Tuesday, versus its 3.43% peak, its highest since 2007. The yield curve remains flat reflecting concern for the world economy, especially as commodity prices offer little respite.
Brent crude futures rose above $123 a barrel, supported by the tight oil supply picture.
State Street’s Graf does not see recession as inevitable but acknowledged that “monetary tightening and the squeeze on real incomes from commodity prices mean the probability has gone up”.
Markets are also having to contend with the dollar’s surge to new 20-year peaks against a basket of currencies.
It eased 0.10% on Tuesday, offering respite to other currencies, but the yen continues to languish at 24-year lows against the greenback.
With the Bank of Japan expanding bond purchases on Tuesday and unlikely to budge from ultra-low rates policy at its Friday meeting, yen respite looks unlikely.
“Given Wednesday may see the Fed go 75 bps and flag more, while the BOJ on Friday will only flag more bond-buying, the yen is not going to stay at these levels for long. It’s going to get much, much worse,” Rabobank strategist Michael Every said.
Reuters
