Canadian Stocks Re-enter Correction Territory Amid Rate Hike Nerves
Canada's main stock market tumbled back into correction territory on Monday and the dollar weakened against its U.S. counterpart as investors raised bets on how high central banks would lift interest rates to tackle inflation.
The Toronto Stock Exchange's S&P/TSX composite index was down 2% at 19,867.43, which left it 10.1% below the record closing high it notched in March.
A correction is confirmed when an index closes 10% below its record closing high. The TSX did that on May 11 and May 12 but then rallied.
The Canadian dollar was trading 0.6% lower at 1.2862 to the U.S. currency, or at 77.75 U.S. cents, as the safe-haven U.S. dollar climbed against a basket of major currencies. It touched its weakest since May 25 at 1.2880.
Wall Street's benchmark S&P 500 was also sharply lower after hot U.S. inflation data on Friday left investors nervous that the Federal Reserve would not be able to control price pressures without triggering a recession.
The U.S. central bank is due to make an interest rate decision on Wednesday.
"The central banks are going out of their way to make it apparent that they are not afraid to raise interest rates perhaps more aggressively than people had been assuming up to now," said Michael Sprung, president at Sprung Investment Management.
Money markets see about a 75% chance that the Bank of Canada would raise interest rates by three-quarters of a percentage point next month, which would be the biggest hike since August 1998, and expect rates to peak at about 3.9% next year.
Just two weeks ago, investors expected a so-called terminal rate of about 3%.
"I think what we are beginning to see is maybe the beginning of some capitulation in the market," Sprung said.
The Toronto market has fallen less than some other major benchmarks this year, helped by its heavy weighting in resource shares.
But the energy sector gave back some recent gains on Monday, falling 1.8%, while the materials group, which includes precious and base metals miners and fertilizer companies, lost 3.3% as gold prices fell.
Technology shares, which are particularly sensitive to higher rates, fell 3.6%, with shares of cloud-based commerce platform company Lightspeed Commerce Inc down more than 12%.
Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year rose 13.3 basis points to 3.486%, its highest since April 2011.
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