Durability of rally in question after TSX racks up a losing week

Investors are rightly curious about the future of the spring rally on the Toronto market after the TSX lost ground last week after four straight weeks of sharp gains.

TORONTO — Investors are rightly curious about the future of the spring rally on the Toronto market after the TSX lost ground last week after four straight weeks of sharp gains.

The TSX gave up 357 points or 3.35 per cent during the week as confidence wavered about whether an economic recovery will be in place by the end of the year and investors thought the market was in need of a break.

After all, the market gains since the rally took off from the lows of March 10 have been impressive — the main Toronto index was up as much as 41 per cent, led by gains of about 150 per cent in the base metals sector and 65 per cent in the energy sector.

Analysts are quick to point out that it’s impossible to predict what happens next with any great degree of accuracy.

“Short term, you just can’t dismiss any possibility,” observed Gareth Watson, associate director and Canadian equity adviser at ScotiaMcLeod.

“What I would note over the past couple of weeks is that volumes have been as low as they have been all year.”

And investors thinking about jumping into the market, or whether this would be a good time to take some profits should consider just what has fuelled the TSX’s dramatic rise.

Watson noted that the performance of the U.S. dollar alone has been responsible for a good chunk of the performance in the commodity sectors.

The price of oil doubled over four months and copper also registered huge gains, hitting an eight-month high just over a week ago as the U.S. dollar weakened, forcing commodity priced in U.S. dollars.

These price increases have also come at a time when the global copper market recorded a surplus of 133,000 tonnes during the first four months of this year, compared with a deficit of 161,000 tonnes in the same period in 2008.

And Watson observed that crude oil inventories in the U.S. are at multi-year highs.

Hopes for higher commodity demand from a resurgent Chinese economy have also helped fuel the commodity sector, but Watson thinks those hopes rest on two weak foundations.

He pointed to an announcement last Thursday from the president of China Minmetals, the state-owned mining giant, that it will be one to two years before China sees growth in demand for industrial metals.

Watson also takes issue that Asia can make up for a sluggish American economy.

“(The U.S.) is still 25 per cent of the world’s economy today,” he said.

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