TSX down almost 1% Friday, U.S. stock markets fall sharply as rate cut hopes wane

Canada’s main stock index lost almost one per cent on Friday as the market saw broad-based weakness, while U.S. markets also fell.

The downward slide comes as investors have had to swallow a bitter pill this week, with U.S. inflation data making interest rate cuts south of the border look less imminent than before.

“I think in general it’s a recalibration of expectations with respect to central banks and interest rates,” said Philip Petursson, chief investment strategist at IG Wealth Management.

The S&P/TSX composite index closed down 210.12 points at 21,899.99.

In New York, the Dow Jones industrial average was down 475.84 points at 37,983.24. The S&P 500 index was down 75.65 points at 5,123.41, while the Nasdaq composite was down 267.10 points at 16,175.09.

There are currently two schools of thought, said Petursson: Those who think equities need interest rate cuts, and those who are more focused on the ongoing strength of the U.S. economy.

On Friday, it was the first school of thought holding the reins. The Nasdaq, heavy with rate-sensitive tech stocks, fell 1.6 per cent. The S&P 500 fell 1.5 per cent and the Dow was down 1.2 per cent.

Expectations for three rate cuts from the U.S. Federal Reserve this year have been pared back this week to two or even one, said Petursson.

Those hoping for rate cuts coming soon have more to look forward to in Canada. The central bank again held its overnight rate steady this week but cuts are looking likely starting in June, said Petursson.

The Bank of Canada cutting earlier than the Fed could have implications for the Canadian dollar, and those have already begun to show up, said Petursson.

“You can argue the Canadian dollar has been hammered this week,” he said.

That could actually put some upward pressure on inflation, he added, but not significantly.

“Really, it’s a trade-off,” he said.

“You’re trading off some potential for inflation, to support the economy. Now, given the inflation rate in Canada and the direction of it versus the U.S., I think the Bank of Canada can afford that.”

The Canadian dollar traded for 72.64 cents US compared with 73.04 cents US on Thursday.

The U.S. also saw earnings season kick off Friday with mixed reports from major banks. The institutions warned of an uncertain year ahead, and JPMorgan’s stock in particular took a beating. Investors are likely being cautious because banks are sensitive to higher interest rates, said Petursson.

He said he’s optimistic about earnings season overall, but noted markets will be extra-sensitive to any sign of weakness in companies’ reports.

“In line with what we’ve seen over the past couple quarters, just meeting expectations won’t be enough. Companies will have to exceed expectations, and in a meaningful way, to see stock prices respond,” Petursson said.

The May crude contract was up 64 cents at US$85.66 per barrel and the May natural gas contract was up one cent at US$1.77 per mmBTU.

The June gold contract was up US$1.40 at US$2,374.10 an ounce and the May copper contract was up one cent at US$4.26 a pound.

— With files from The Associated Press

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