The TSX slumped on Wednesday due to worrying inflation data and a dip in precious metals.

The TSX Capped Materials Index fell by 1.39 per cent led by similar losses in gold, which reacted to a stronger U.S. dollar and a rise in U.S. treasury yields.

The TSX Capped Energy Index rose by 2.84 per cent on a jump in crude prices. Crude remains below all-time highs, caught in the dissonance between OPEC production cuts, the growing potential of a global recession, and E.U. sanctions on Russian oil exports, effective on December 5, aimed at the tanker market.

A gas leak at the Kashagan field in Kazakhstan has also affected production. Kazakhstan is Central Asia’s largest producer and one of Europe’s most important alternatives to Russian energy.

Canadian inflation slowed for a third-straight month to 6.9 per cent in September, slightly above the 6.7 per cent consensus, doing little to temper expectations of another major rate hike from the Bank of Canada on October 26.

The figure, despite a 7.4-per-cent drop in gasoline prices, reflects broad-based pressures from low unemployment and wage gains, which have risen 5.2 per cent YoY on an average hourly basis.

Food prices rose by 11.4 per cent YoY, the fastest since August 1981, due to unfavourable weather, higher input prices (fertilizer, natural gas) and supply chain issues due to Russia’s invasion of Ukraine.

Canadians are also signing mortgages at higher rates, with the mortgage interest cost index increasing YoY for three consecutive months.

Bonds reacted to the data, with the Canadian two-year yield gaining 7 basis points. The 5-year and 10-year yields also rose. 

Markets are pricing in a 60-per-cent chance of a 0.75-per-cent rate hike on October 26, which would take the benchmark overnight lending rate to 4 per cent, the highest since the Great Financial Crisis of 2008.  

There is a strong case for a Canadian recession in 2023 due to the confluence of decreasing equities and commodity prices and a weakening U.S. economy. Slowing growth will hurt consumers and overall productivity, but this should be softened by the country’s outsized energy exposure and stable political foundation, which may attract considerable international investment in the space and contribute to lower global prices over the next few years.

South of the border, the U.S. is also descending into recessionary territory due to expectations of additional tightening from the Federal Reserve and ensuing weakness in markets and GDP.

The S&P 500 was down by 1.3 per cent in early afternoon trading, ending a recent rally spurred on by earnings surprises to the upside. Though these surprises continued with the likes of Netflix, United Airlines and Procter & Gamble, earnings estimates have been slashed in recent months to the point of inciting minimal shareholder enthusiasm.

According to projections from Bloomberg Economics, there is a 100-per-cent chance of a U.S. recession in the next 12 months.

Investors are remaining vigilant for stabilizing bond yields and mortgage rates as signals of a more dovish monetary policy ahead, heralding the return of a broad-based appetite for risk. In the meantime, companies with reliable cash flow and minimal debt, in spaces shielded from consumer sentiment, represent a prospective opportunity set against a worsening slowdown.

The TSX closed down by 0.66 per cent, bringing its total losses to over 12 per cent YTD.

The S&P 500 also closed down by 0.66 per cent, raising its losses this year to 22.96 per cent.

Developed International and Emerging Markets, both down over 20 per cent YoY, continue to represent the most attractive valuations at an approximate price-to-earnings ratio of 11.

Market movers

Though commodities have fallen due to uncertainty around sustainable consumer demand, their utility as a hedge against inflation and their high barriers to production have driven our investors to seek out bright spots in the space, with emphasis on the following stories:

Volt Carbon (VCT) announced the commissioning of a thermogravimetric analysis machine at its Guelph plant. The machine can test materials up to 1,100°C, which is required for graphene and graphite testing and characterization.

Monarch Mining (GBAR) reported widespread high-grade gold assays from its Swanson Gold Project in Quebec.

Finally, Osisko Mining (OSK) announced a new regional exploration program on its Urban-Barry Gold Project in Quebec.

Notable capital raises since our last update include Avidian Gold, Power Nickel, Latin Metals, Kootenay Silver, Fire & Flower and MineHub.


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