TORONTO — North American stock markets reversed early losses after the U.S. Federal Reserve removed uncertainty by confirming it would accelerate the shrinking of monthly bond purchases and raise interest rates three times next year.
The S&P/TSX composite index ended a five-day skid by closing up 120.59 points to 20,769.16, after hitting an intraday low of 20,526.10.
In New York, the Dow Jones industrial average was up 383.25 points at 35,927.43. The S&P 500 index was up 75.76 points at 4,709.85, while the Nasdaq composite was up 327.94 points at 15,565.58.
Candice Bangsund, portfolio manager for Fiera Capital, said a doubling of the draw-down of bond purchases was expected since Fed chairman Jerome Powell telegraphed the move during his recent Congressional testimony in light of stronger inflation.
The elevated tapering means all bond purchases will end in March, three months earlier than previously indicated.
“The one hawkish development though, was the Federal Reserve’s interest rate forecasts for 2022,” Bangsund said in an interview.
“They’re now expecting three rate hikes next year, which is a much steeper and aggressive trajectory than what had been expected going into the meeting.”
However, she said markets took the rate announcement in stride because economic growth is expected to remain strong next year, helping to absorb some of the higher rates.
The quicker tapering of so-called quantitative easing gives the central bank more flexibility to raise rates in response to persistently elevated inflation, Bangsund said.
The Fed, which recently dropped its insistence that inflation was only temporary, raised its projections to 4.4 per cent this year from 3.7 per cent, and to 2.7 per cent from 2.3 per cent for 2022.
“So by accelerating the QE taper that opens the door to earlier rate hikes if necessary,” she said.
U.S. rate hikes are now expected in the second, third and fourth quarters of 2022.
Bangsund said the Bank of Canada could begin hiking its interest rates in January, with the market expecting five rate hikes in 2022.
She said investors and equity investors are beginning to embrace higher rates given elevated inflation because the global economy and U.S. and Canadian economies are quite strong and are likely to remain so next year.
“Historically, the first year (or) maybe two after the rate hike process begins, equity markets have proven to hold their gains and perform quite well.”
Technology led the TSX higher Wednesday as seven sectors gained on the day.
The sector rose 1.4 per cent with shares of Hut 8 Mining Corp. up 5.9 per cent and BlackBerry Ltd. increasing 3.7 per cent.
Consumer staples was up one per cent, industrials slightly less than that and heavyweight financials 0.9 per cent higher on increased bond yields.
Health care, materials, telecommunications and energy were lower.
Materials lost 0.6 per cent as the Fed announcement raised bond yields and the U.S. dollar while hurting non-interest bearing assets like gold.
The February gold contract was down US$7.80 at US$1,764.50 an ounce and the March copper contract was down 7.5 cents at US$4.18 a pound.
Shares of Turquoise Hill Resources Ltd. and Osisko Mining Inc. were down 7.5 and four per cent, respectively.
Energy rallied from steeper losses as crude oil prices recovered from an early report that U.S. stockpiles increased last week.
“Oil prices jumped back into positive terrain for today and that again is just an improved risk appetite and strong growth supporting the outlook for energy demand,” said Bangsund.
The January crude contract was up 14 cents at US$70.87 per barrel and the January natural gas contract was up 5.5 cents at US$3.80 per mmBTU.
MEG Energy Corp. lost two per cent while Whitecap Resources Inc. was down 1.4 per cent.
The Canadian dollar traded for 77.56 cents US compared with 77.85 cents US on Tuesday.
The Fed’s action pushed other news, including ongoing concerns about the Omicron COVID-19 variant, to the backburner at least for the day, said Bangsun.
“Now with the Fed announcement behind us, investors will likely shift their focus back to the Omicron and the impacts on on the economy.”
This report by The Canadian Press was first published Dec. 15, 2021.
Companies in this story: (TSX:HUT, TSX:BB, TSX:TRZ, TSX:OSK, TSX:MEG, TSX:WCP, TSX:GSPTSE, TSX:CADUSD=X)
Ross Marowits, The Canadian Press