The Toronto stock market is likely in for more selling pressure this week as a round of volatility in commodity markets threatens to send the resource-heavy TSX further away from where it started the year.
“There are very good reasons,” said John Stephenson, portfolio manager at First Asset Funds Inc.
“Clearly it’s been the space to invest in for the last year and a half or so. And it’s all premised on global growth and what’s been the fly in the ointment lately has been the fact that global growth is now increasingly called into question.”
Investors will also take in a dramatic new development in the future of the operator of the Toronto Stock Exchange.
TMX Group Inc. (TSX:X) said Saturday it has it has received a takeover offer from a group called the Maple Group Acquisition Corp., made up of several leading financial institutions including CIBC World Markets, TD Securities, Scotia Capital and National Bank Financial. The offer is valued about $3.6-billion.
TMX Group is in the midst of an attempted multibillion dollar merger with the London Stock Exchange. But that proposal has come under fire from several groups, including some of Canada’s big banks, which are concerned the merger with the London exchange could leave Canada’s biggest stock exchange dominated by foreign interests.
The Toronto market lost 189 points or 1.39 per cent last week, its third down week in a row, leaving the main index 66 points below its Dec. 31 close.
The slippage came amid big drops in the price of copper, which is used as a barometer of health in the commodity sector because it’s used in so many applications, and big swings in the price of oil.
Further losses were triggered by data showing inflation continues to be a big headache for the Chinese government, which announced it was raising reserve requirements for most banks as a way to slow the economy.
And oil prices were slammed mid-week after other data showed that U.S. gasoline demand dropped almost two and a half per cent last week while oil supplies grew more than twice as much as analysts expected, sending crude tumbling almost US$6.
“And this is what really impacted the oil complex,” added Stephenson.
“Was it dramatic? Oh, my god, was it ever. Ugly.”
On top of all this, interest rates have been heading higher in Asia.
“And what people are saying right now is the whole darn mess is all screwed up, what we were betting on was a strong recovery in Asia with modest inflation,” said Stephenson.
“And what we’re getting is inflation through commodities and growth is going to slow because the governments are going to fight inflation, because they have to.”
Further depressing commodity prices is a stronger U.S. dollar, which gained ground Friday after the European Union warned that the debt loads of Greece, Ireland and Portugal will be much bigger than previously forecast.
The assessment added to fears that international bailouts are failing to solve the region’s crisis
Oil and other commodities are priced in U.S. dollars and a stronger currency makes crude less of a bargain for buyers who use other currencies and the price falls.
The TSX finished trading last week about 6.25 per cent down from the 2011 high of about 14,270 which was reached in early April and Stephenson expects market deterioration to go on for awhile yet.
“I think basically what is the order of the day for at least the next couple of months would appear to be more volatility so I think investors are well suited to look for things that are defensive, things that pay dividends,” he said.
“Longer term, commodities do trend higher but that’s the story for 12 months or 24 months from now. I think for the average person, chasing after the next hot stock for now is probably not where you want to be.”
Meanwhile, the earnings reporting period for the last quarter is winding down and investors will also focus on economic data.
The major data from the U.S. is industrial production for April, which will be released on Tuesday. Economists expect production to come in at 0.4 per cent, down sharply from 0.8 per cent in March as businesses deal with parts shortages from Japan, which is still reeling from the effects of the March 11 earthquake and tsunami.
In Canada, traders will look to the latest inflation reading on Friday. The consumer price index is forecast to show a gain of 0.4 per cent after charging ahead 1.1 per cent in March because of higher prices for food and gasoline.
The latest retail sales data also comes out Friday. Statistics Canada is expected to report that sales rose one per cent in March on higher auto and gasoline sales.