The TSX was in the green today on gains in financials following Wednesday’s rate hike from the Bank of Canada (BoC).
Scotiabank, National Bank and The Bank of Montreal each added over 2.3 per cent while CIBC, TD and Royal Bank added between 1.2 and 1.7 per cent.
The financial sector was up by 1.64 per cent with industrials contributing a 0.8-per-cent gain to the index.
The BoC raised its policy rate by 75 basis points to 3.25 per cent on Wednesday, representing its fifth consecutive rate hike since March.
Inflation stands at 7.6 per cent YoY as of July, almost four times the BoC’s 2 per cent target, with data indicating widespread price pressures concentrated in services.
The central bank believes COVID outbreaks, supply disruptions and the war in Ukraine will continue to raise prices in most countries until the end of the year. At that point, it expects demand to moderate as monetary policy allows suppliers to top up inventories and production power.
This moderation is already in evidence with wheat (-28 per cent), lumber (-65 per cent), and copper (-30 per cent) well off their highs, and Canadians stepping away from mortgage loans, credit card use and credit markets with increasing momentum.
Oil also remains volatile, down approximately 27 per cent from its high, as COVID lockdowns in China hamper demand from the world’s largest fuel importer and elevated prices at the pump force retail and industrial consumers to cut back.
The oil market may view record prices as transitory due to Russia’s poor long-term prospects of weaponizing its supply. Contrary to ongoing fuel shortages, yesterday’s 7-per-cent drop occurred in line with President Vladimir Putin’s announcement that Russia would not sell crude to any nation backing the U.S.-led initiative to place a price cap on its fuel.
Canada’s GDP grew by 3.3 per cent in Q2, slightly below BoC projections, adding further credence to its tightening plan, though domestic demand remained elevated for the quarter. Consumption grew by 9.5 per cent, with business investment growing by almost 12 per cent, as over C$300 billion in COVID stimulus funds continue to work their way back into the economy.
Given unrelenting post-pandemic demand, the BoC expects to raise its policy rate further with its next decision scheduled for October 26. Officials from the U.S. Fed and the ECB have expressed similar sentiments.
Another hike from the BoC would meaningfully increase the probability of a recession, considering Canada has the second-highest private sector debt to GDP in the world, but would likely be supported by record low unemployment of 4.9 per cent.
Annual inflation has been above the BoC’s 1-3 per cent control range for 16 straight months.
From an investment perspective, slowing economic growth favours astute fundamental analysis, with emphasis on free cash flow to weather near-term pain and profitability to substantiate a long-term time horizon. Conversely, story stocks and their overly rosy outlooks will have a tough time justifying losses on their paths to market dominance. As conditions worsen, the distance between these poles will only widen.
Prospective areas to focus on include:
- Financials, with banks enjoying outsized spreads between loans and customer deposits
- Consumer discretionary, as consumers seek out services shuttered during the pandemic
- Energy companies, with prices allowing for profitable production in spite of their recent downward trend
The TSX closed up by 0.89 per cent for the day, cutting its losses down to just over 6 per cent over the past year. Its performance remains favourable compared to the rest of the world, with the U.S. down 10.5 per cent, Developed International down 22.93 per cent, and Emerging Markets down 24.12 per cent over the past year.
Market movers
As commodity companies continue to benefit from supply crunches and higher prices, our investor community continues to gravitate toward attractive issuers in the space:
Resouro Gold (RAU) recently signed a term sheet with IAMGOLD (IMG) to acquire the Peixoto Gold Project in Brazil.
Trillion Energy International (TCF) announced that the Uranus rig is slated to arrive at its SASB Gas Field by September 11, with new gas production expected by the end of October.
Finally, NEO Battery Materials (NBM) has provided an update on recent activities, including sample evaluation and product optimization with global battery cell manufacturers, and ongoing trials to manufacture carbon nanotube-composite silicon anodes based on its pending patent.
Capital raise announcements since our last update include Ridgeline Minerals, Standard Uranium, Bessor Minerals, Spey Resources, Psyence Group, Red Pine Exploration, BuildDirect, Ultra Lithium and Unigold.
