Market Commentary - September 5, 2008
Commodities producers drive TSX sharply lower as global growth concerns mount
Canada’s resource-heavy S&P/TSX composite index closed sharply lower over the four trading days ended September 4, 2008 as mounting fear of slowing growth weighed upon the world’s major equity markets. (North American markets observed Labour Day September 1.)
The benchmark fell 6.8 per cent over the abbreviated week, with the nation’s materials and energy producers accounting for the bulk of the decline. The sectors, which together account for roughly half of the value of the composite index, plunged 12.1 per cent and 9.5 per cent, respectively, as prices for commodities such as oil, natural gas, gold and copper continued to soften.
While the benchmark’s commodities producers led the retreat, losses were by no means limited to the resource complex as nine of the TSX’s ten sectors fell more than 2 per cent this week. The benchmark’s Financial sector emerged relatively unscathed, slipping 1.4 per cent.
Bank of Canada policymakers this week acknowledged slowing global growth has reduced demand for commodities more than they anticipated in their July Monetary Policy Report Update. Still, as expected, the Bank held its overnight lending rate at 3 per cent.
South of the border, the S&P 500 index fell 4.9 per cent over the four trading days ended September 4 as evidence of slowing growth in the world’s largest economy continued to mount.
Figures released August 29 by the U.S. Commerce Department show U.S. consumer spending slowed in July. After climbing 0.6 per cent in June, consumer spending rose just two-tenths of a per cent in July, reflecting the severe downturn in U.S. housing values, a tighter job market and higher prices for gas.
Meanwhile, the U.S. Federal Reserve’s “Beige Book” – a summary of current economic conditions -- this week described business conditions across many regions of the U.S. as “weak,” “soft” and “subdued.”The Central Bank also says the slumping U.S. housing market may continue to weaken.
Lastly, figures released Thursday by the U.S. Labour Department show the number of Americans collecting unemployment insurance benefits has risen to its highest level since November of 2003.
The gloomy data drove all ten of the S&P 500’s sectors lower on the week. The gauge’s Information Technology sector led the retreat, falling 8.6 per cent, while the Energy and Materials sectors each fell 8.2 per cent.
In Europe, the Dow Jones Stoxx 600 index fell 3.1 per cent this week as evidence of slowing growth in the euro-zone mounted. The benchmark’s Basic Materials sector led the retreat, falling 9.1 per cent.
Figures released this week show the European economy contracted by two-tenths of a per cent in the second quarter. At the same time, the European Central Bank (ECB) this week cut its 2008 economic growth forecast from 1.8 per cent to 1.4 per cent and predicted growth would slow to 1.2 per cent next year, down from 1.5 per cent in the Bank’s last forecast.
While the ECB acknowledged the headwinds to growth, the Central Bank this week held its benchmark lending rate at a seven-year high of 4.25 per cent. The Bank of England also opted to hold its rate steady at 5 per cent. With inflation running at multi-year highs in Europe and the U.K., the Central Banks are determined to prevent prices from spiralling higher.
Growth concerns also swept across Asia this week. The Morgan Stanley Capital International AC Asia Pacific (excluding Japan) Index -- a gauge of 14 markets across the region – fell 4.9 per cent. In Japan, the Nikkei 225 Stock Average slipped 1.7 per cent to reach a five-and-a-half month low.
Finally, ten-year U.S. Treasuries closed sharply higher this week as several signs of slowing U.S. growth drove yields to their lowest level in almost five months. Yields, which move inversely to prices, fell 16 basis points to 3.63 per cent.
Tim Johal, Portfolio Manager, I.G. Investment Management, Ltd.
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