Canada’s main stock market, the Toronto Stock Exchange, closed Friday up 345 points or 1.85%, but this followed two days with total losses of near 550 points as concerns that high inflation and an aggressive rate hiking path both here in Canada and in the United States will lead to a recession across North America continued to, as BMO Economics put it today, throw a “serious shadow” over investor sentiment.
The mood of investors in the resources heavy TSX hasn’t been helped, said Douglas Porter, Chief Economist at BMO Economics, by a recent retreat in commodity prices — although they recorded modest gains today. Among sectors today, Energy was up 2.5% and Materials up 2.2%.
Porter in his weekly ‘Talking Points’ note cited the “surprising sag” in a wide variety of commodity prices as a key indicator reinforcing the view that growth may soon “buckle”. He noted that even with a firming on Friday, they are still close to the lowest levels since early May at near $107, “backing away somewhat from an alarming trend earlier this month.” He noted North American natural gas prices have taken an even bigger step down, albeit for a variety of reasons beyond the growth outlook. Perhaps more telling, he said, is the sharp pullback in industrial metals, particularly copper, with the red metal down almost 20% in the past three weeks and now at its lowest ebb since early 2021, after hitting a record high in the immediate aftermath of the Ukraine invasion. “In fact,” Porter added, “many broad measures of ex-energy commodities — even agriculture — are now lower than pre-invasion levels amid global growth concerns.”
Porter said the sudden pullback in commodities and weaker global growth outlook has “thrown a serious shadow” on Canada’s prospects. He noted BMO has long asserted that Canada’s relative near-term outlook versus the U.S. had two big positives, and one big negative. Porter said the latter is the extreme dependence on housing, “which is quite clearly staring into the teeth of a deep correction.” But, he added, “that drag” was expected to be more than offset by greater room for a reopening bounce, and the boost from a greater reliance on commodities and a positive terms of trade lift. For instance, he noted, export price gains have outstripped the rise in import prices by more than 20% over the past two years. “But,” he said, “with many resource prices now retreating, that boost is at risk of fading.” On cue, Porter noted, the TSX has been hit hard in recent weeks, especially relative to U.S. averages. In the short space of three weeks, the TSX fell 11% by Thursday’s close, and had now shown next to no outperformance versus the S&P 500 since the Russian invasion began.
Of commodities themselves today, gold eked out a minor gain on Friday as the dollar weakened while bond yields rose. Gold for August delivery closed up US$0.50 to US$1,830.30 per ounce.
Also, West Texas Intermediate (WTI) crude oil closed higher following two days of losses as tight supply offset the recession worries that pushed prices lower. WPI crude for August delivery closed up US$3.35 to US$107.62 per barrel, Marketwatch reported. August Brent crude, the global benchmark, was last seen up US$2.79 to US$112.84, while Western Canada Select was up US$3.07 to US$89.38 per barrel.