The Toronto Stock Exchange closed lower on Friday, dragged down by widespread weakness fueled by the metals and technology sectors, while major US indices posted gains.
After a weaker August following the first half’s tech rally, markets appeared to be under pressure heading into September, observed John Zechner, president and principal equity manager at J Zechner Associates.
The problem weighing on markets is the continued realization that interest rates will likely have to stay high for longer, he said.
As oil prices continue to rise, nearing US$88 a barrel on Friday, inflation could accelerate this fall, Mr. Zechner added, which would put more pressure on central banks. The economic data that are published send a mixed message: a slowdown in the economy, but still astonishing strength, he stressed.
“The markets are digesting all this and realizing that they may have been a little too optimistic regarding rates,” he said.
The latest Canadian labor market report showed more jobs than expected were created in August, while the unemployment rate remained steady at 5.5%, snapping a three-month streak increase.
But investors were much more surprised by Canada’s latest second-quarter gross domestic product (GDP) figures, which showed a surprising contraction last week, Zechner said. “No one expected a negative number.”
Overall, investors are grappling with a mix of economic data, long-term interest rate expectations and concerns about weakening consumption, he summarized.
“You don’t want the data to be too strong, otherwise the rates will be even higher, for a longer period of time. But on the other hand, profits are threatened if the downward acceleration is too great and too fast.”
Now that the Bank of Canada’s decision to maintain interest rates is out of the way, attention turns to the United States Federal Reserve later this month. It is almost certain that she will also leave rates unchanged, said Mr. Zechner. But the bigger question is whether another rate hike is on the cards for later this year in the United States.
“They want to give the impression that that’s the case, because they just don’t want to take the risk of driving up inflation,” he said. “They just don’t want to start a fire because of it. So it’s a balancing act.”
But the market is not really buying into the current hawkish rhetoric from central banks and may still be too optimistic, Mr. Zechner noted. “The market is buying into the scenario that growth will slow, inflation will moderate and rates will fall by the middle of next year.”
This optimism could pose a risk for the entire market, he warned.
Here are the winners and losers for September 8, 2023:
|The S&P/TSX index of the TSE||Price||Change in Canadian dollars||Change in %|
|Canopy Growth (WEED)||1.27||0.24||23,301|
|Gatos Silver (GS)||6.89||0.79||12,951|
|Aptose Biosciences (APS)||4.80||-0.36||-6.977|
|Dream Office Real Estate Investment (D.UN)||11.74||-0.87||-6,899|