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Canada Stocks Close Down 190 Pts, To End Winning Run, Amid Lower Commodity Prices; BMO Capital Markets Remains Overweight Canadian Materials

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Canada’s main stock market, the Toronto Stock Exchange. lost more than 100 points over Tuesday afternoon to take session losses to a total of 190 points or near 1%, with the resources heavy index weighed down by lower commodity prices and fresh concerns around high inflation, the impact of which was seen in lower than expected Canadian Q1 gross domestic product (GDP) data earlier in the day.

While GDP expanded by a 3.1% annualized pace, this was less than the 5.2% seen by economists and lower than preliminary data from Statistics Canada flagged. And Statistics Canada reported a preliminary estimate of only 0.2% growth for April.

Today’s losses brought to an end the longest winning run for the TSX since October 2021.

Among heavyweight sectors, Energy was down 2.1%, Materials down 1.45% and Financials down near 0.4%. The best performing sector was Real Estate.

Of commodities today, gold traded lower as the US dollar and bond yields rose with investors looking to shed risk on worries over rising interest rates. Gold for August delivery closed down $8.90 to US$1,848.40 per ounce.

And West Texas Intermediate crude oil ended lower after earlier rising to the highest since early March following reports OPEC+ may exempt Russia from its production quotas. WTI crude for July delivery closed down $0.40 to US$114.78 per barrel after earlier touching US$119.98. July Brent crude, the global benchmark, was last seen up $1.17 to US$122.84 while Western Canada Select was up $0.14 to US$97.23 per barrel.

Still, BMO Capital Markets in a ‘Canadian Strategy Snapshot’ dated May 30, 2022, said it remains overweight Canadian Materials. From BMO’s perspective, there is “very little fundamentally that it does not like” about the Canadian Materials sector. In fact, the bank noted, after nearly a decade of operational discipline, profit margins and profitability are near record levels and well above historical averages. Furthermore, it said, cash generation has been strong as the sector continues to display consistent capital spending discipline resulting in the most robust distribution growth on record.

BMO believes this trend can continue even as earnings growth decelerates and commodity prices soften. Indeed, on fundamentals alone, it said, the Canadian Materials sector checks all its boxes — valuations are below historical averages, operating metrics are firmly above historical averages, cash generation is near record levels, cash is being returned to shareholders, debt to equity is well below historical average and capital spending remains moderate showing strong cost discipline. “As such,” BMO added, “we continue to believe the Material sector’s fundamentals are well positioned to withstand any potential near-term commodity price volatility. Furthermore, according to our work, the Canadian Materials sector’s strong exposure to gold stocks adds a level of tactical defense against periods of broad equity market weakness as gold equities tend to meaningfully outperform during broad US equity market corrections and even bear markets.”

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