TORONTO — Both the Toronto stock market and the Canadian dollar are likely in for more pressure as markets anticipate that the U.S. Federal Reserve is set to start winding down a key element of its economic stimulus.
“We’re entering a more volatile period,” said Camilla Sutton, chief currency strategist at Scotia Capital. Both the TSX and the loonie were slammed last week after the Fed said it could wind down its bond-buying program by the middle of next year if the economy continues to improve.
The Fed has been pumping US$85 billion dollars a month into financial markets by buying government treasurys and mortgage-backed securities.
That program has kept long-term interest rates low and helped keep a rally going on many stocks markets almost non-stop since the end of last year.
But anticipation that the Fed would slow, and eventually end, its bond purchases had the effect of depressing stock markets, pushing the U.S. dollar higher and raising bond yields.
The reaction left the Canadian currency down 2.7 cents last week, leaving it at 95.64 cents US, its lowest close since November 2011.
“Overall, our view is that we moved higher really based on the U.S. dollar outlook, certainly, partially, because of the Fed,” added Sutton, “but we also have some dampening in growth out of China so the combination of that is a slightly weaker Canadian dollar.”
The whiff of higher interest rates down the road depressed North American stock markets as the TSX plunged 192 points or 1.57 per cent last week, leaving the main Canadian index down 3.53 per cent year to date.
“I think for Toronto, the market is going to struggle,” said John Stephenson, portfolio manager at First Asset Funds Inc.
The Dow industrials fell 271 points or 1.8 per cent last week but at least the blue chip index is still up 13 per cent for the year.
The TSX was already finding it tough to keep its head above water, largely because of a resource sector that has reflected the weakness of a sluggish economic recovery.
Gold stocks have also tumbled as miners ran against three-year lows for bullion prices last week as worries over inflation practically disappeared.
“I think we’re way too reliant on the materials and energy space and clearly they’re under pressure and the strengthening U.S. dollar is negative for all commodities so that’s the most important thing when evaluating commodity stocks,” said Stephenson.
“And then you’ve got relatively slow growth in the market that matters (China). So you add it all together and it’s a depressing thing. The only silver lining in it is that valuations are starting to become attractive now.”
There is little to serve as a distraction for investors this week.
The economic calendar is light with the major U.S. report coming out Tuesday. Economists expect that durable goods orders for may were up three per cent, following a 3.5 per cent gain the previous month.
There is also data coming out on new home sales and consumer confidence
The Canadian dollar could find some support from the latest reading on economic growth.
Statistics Canada is expected to report that gross domestic product in April grew by 0.1 per cent, down from a 0.2 per cent rise in March.
Traders will start to take in second quarter corporate earnings in early July but Stephenson doesn’t think they will find much to cheer about.
“In fact it’s exactly the opposite,” he said.
“When you look at the number of warnings versus upgrades, it’s running at a six to one ratio which is three times bigger than normal. In other words, companies are guiding to worse results. So in fact corporate Canada, corporate America is definitely looking like the second quarter will be very weak or certainly weaker than expectations.”
Smartphone maker BlackBerry (TSX:BB) is scheduled to report its first-quarter results on Friday morning before markets open. The financial details will give a clearer picture of how the company’s new touchscreen phone is selling in the U.S., and whether shipments of its new keyboard model are meeting expectations.