Canada’s main stock index opened lower on Wednesday, dragged by energy shares on weaker oil prices. Domestically, the focus is on the Bank of Canada, which maintained its trend-settling overnight interest rate at 0.25% but offered a hawkish view on where things go from here, opening the door to higher interest rates by as soon as April of next year. The Canadian dollar spiked about half a cent and Canadian bond yields surged on the news.
The Bank of Canada said it is ending its quantitative easing program and moving forward its timeline for potential interest rate hikes as it projects inflation to remain elevated well into next year.
In its Wednesday rate decision, the central bank said it could start raising its benchmark rate “sometime in the middle quarters of 2022,” ahead of the previous guidance of the second half of 2022.
It also said that it would end its quantitative easing (QE) program, a measure launched at the start of the pandemic that has seen the central bank buy hundreds of billions of dollars worth of federal government bonds and quadruple the size of its balance sheet in an effort to hold down interest rates.
“The unexpected change in the BoC’s output gap outlook took markets (and us) by surprise, sending the yield on Canadian 2-yr bonds above 1% for the first time during the pandemic period and OIS [Overnight Index Swap] markets are now pricing in a March rate hike,” Scotiabank forex strategists said in a note.
“The BoC’s phrasing still suggests that a July hike is the most likely scenario but we concede that the odds of an April hike (alongside new MPR projections) have significantly risen based on today’s communications. Already the BoC was expected to lead the Fed by one quarter and by 75bps by the end of the year. Today’s statement suggests this may be two quarters and as much as 125bps,” they said.
In morning trading, the Toronto Stock Exchange’s S&P/TSX composite index was down 32.58 points, or 0.15%, at 21,140.87.
U.S. stock indexes opened slightly higher, helped by a fresh batch of upbeat earnings reports.
The Dow Jones Industrial Average rose 78.55 points, or 0.22%, at the open to 35,835.43. The S&P 500 opened higher by 5.43 points, or 0.12%, at 4,580.22, while the Nasdaq Composite gained 40.29 points, or 0.26%, to 15,276.00 at the opening bell.
Global equity markets were under modest pressure this morning as a flare up in U.S.-China tensions, signs of further regulatory crackdown from Beijing and a rise in short-dated U.S. Treasury yields dented sentiment. The U.S. Federal Communications Commission has voted to revoke the authorization for China Telecom’s U.S. subsidiary to operate in the United States after nearly two decades, citing national security.
Oil prices fell after industry data showed crude stockpile rose more than expected and fuel inventories unexpectedly increased last week in the United States.
The Toronto Stock Exchange’s S&P/TSX composite index .ended down 0.5% at 21,173.45 on Tuesday, its first lower close since Oct. 4. After snapping a seven-month winning streak in September, the Canadian equity index has gained 6% so far this month, on course for its best monthly performance since November 2020.
Tech heavyweights Alphabet, Twitter and Microsoft reported earnings that were generally better than analysts’ expected after the closing bell on Tuesday. But their shares have found little lift after the results, suggesting to some that the recent stock market rally is getting tired, with a lot of earnings optimism already baked into prices.
Stronger-than-expected earnings reports have helped drive the S&P 500 and Dow back to all-time highs this week, while bringing the tech-heavy Nasdaq just below 1% from its record peak.
Profit for S&P 500 companies is expected to grow 35.6% year-on-year in the third quarter, with market participants gauging how companies are navigating supply-chain bottlenecks, labour shortages and inflationary pressures induced by the COVID-19 pandemic.
MSCI’s global equity benchmark is hovering close to Monday’s seven-week high and is on track for the best month in almost a year.
However, European stocks softened, led by a 1.6% drop in mining and resource firms. Bank shares also slipped, with Deutsche Bank down more than 5% despite forecast-beating earnings .
The losses started earlier in Asia, where tech stocks suffered hefty falls after China’s internet watchdog said it planned stricter registration rules for younger net users.
Commodities
Oil prices fell on Wednesday after industry data showed crude oil stockpiles rose more than expected and fuel inventories increased unexpectedly last week in the United States, the world’s largest oil consumer.
Brent oil futures fell $1.01 cents, or 1.2%, to $85.39 a barrel in early morning trade after closing at the highest level in seven years on Tuesday.
West Texas Intermediate (WTI) futures were down $1.19, or 1.4%, at $83.46 after gaining 1.1% in the previous session.
Both benchmarks remain near multi-year highs and closed on Friday with a seventh straight weekly gain as major producers hold back supply and demand rebounds after the easing of pandemic restrictions.
Crude oil inventories rose by 2.3 million barrels in the week ending Oct. 22, market sources said late on Tuesday, citing American Petroleum Institute figures. That was more than the expected 1.9 million barrel gain.
Gasoline inventories rose by 500,000 barrels and distillate stocks increased by 1 million barrels, compared with a forecast for both to drop.
With Brent rising for the past eight weeks and WTI climbing for the past 10 weeks, prices are starting to look overbought, analysts said.
“Barring more bullish headlines, which is possible considering what we saw yesterday, we could see some profit-taking in Brent and WTI, which would be healthy for the market,” said Craig Erlam, senior market analyst at OANDA.
Storage tanks at the WTI oil delivery hub in Cushing, Oklahoma, are more depleted than they have been in the past three years, with prices for longer-dated futures contracts pointing to supplies staying at those levels for months.
However, a patchy recovery around the world from the worst health crisis in 100 years, has often led to doubts over the sustainability of oil prices.
Currencies and bonds
The Canadian dollar shot up past 81 cents US on the Bank of Canada news, after trading slightly weaker against the greenback earlier. The bank’s governor will hold a news conference at 11 am ET, which could ignite further volatility in the currency.
Canadian bond yields surged, with the 2-year bond yield jumping about one-quarter of a percentage point to 1.24%. The 10-year Canada bond yield also rose, despite yields slipping in the U.S.
The Bank of Canada has clearly taken traders by surprise. But some economists caution that higher interest rates still may not be in the cards until the second half of next year.
“The Bank of Canada called time on its QE program today and indicated that it could raise interest rates as soon as the second quarter of next year. The Bank’s GDP forecasts still look too upbeat to us, however, so we expect it will wait until the third quarter of 2022 before pulling the trigger,” said a note from Capital Economics in reaction to the announcement.
The bank now expects GDP to increase by 5.0% this year, down from 6.0% previously, and by 4.3% in 2022, from 4.6% previously. But the key reason is that the Bank has downgraded its assessment of the economy’s potential, noting in the policy statement that “shortages of manufacturing inputs, transportation bottlenecks, and difficulties in matching jobs to workers are limiting the economy’s productive capacity,” noted Capital Economics. As a result of this, the Bank also upgraded its projections for inflation, and now expects headline inflation to remain well above 3% in 2022.
Other corporate news
Algonquin Power & Utilities Corp. shares were down more than 3% in morning trading after announcing late Tuesday it has agreed to acquire Kentucky Power Company for US$2.846 billion from American Electric Power. To help pay for the acquisition, Algonquin has agreed to a bought deal financing with a syndicate of underwriters in which they will purchase 44.080 million common shares at a price of C$18.15 per share. There is also an overallotment option, which if exercised in full, will mean gross proceeds of the deal will be worth C$920 million.
Canadian miner Teck Resources Ltd reported an eight-fold jump in third-quarter adjusted profit on Wednesday, driven by higher prices for steelmaking coal on the back of surging demand from China.
Microsoft Corp rose 2.1% in premarket trading after it forecast a strong end to the calendar year, thanks to its booming cloud business.
Twitter Inc gained 1.4% after the social networking site’s quarterly revenue grew 37% and avoided the brunt of Apple Inc’s privacy changes on advertising that hobbled its rivals.
Google owner Alphabet Inc reported record quarterly profit for the third straight quarter on a surge in ad sales. However, its shares were down 0.6% after rising nearly 59% so far this year.
Robinhood Markets Inc slipped 8.4% after the retail broker reported downbeat third-quarter revenue as trading levels declined for cryptocurrencies including dogecoin.
Boeing Co eked out a small adjusted profit in the third quarter, helped by a ramp-up in deliveries of its once best-selling 737 MAX jets amid a rebound in global air travel, but the company booked charges on its problem-plagued 787 and Starliner spacecraft programs. Shares of Boeing are up 0.6% in premarket trading.
General Motors Co. reported stronger-than-expected results for the third quarter, despite a drop in revenue and profit, and said full-year earnings would be at the high end of its previous forecast. GM said adjusted earnings per share in the quarter dropped to $1.52, from $2.83 a year earlier, citing the global semiconductor shortage. Analysts had expected 96 cents a share. GM shares were down 1.4% in premarket trade.
U.S. hotel operator Hilton Worldwide Holdings Inc reported a quarterly profit on Wednesday, compared with a year-ago loss, as easing pandemic-led restrictions drove a recovery in leisure travel.
McDonald’s Corp reported quarterly U.S. sales on Wednesday that beat Wall Street expectations, helped by higher prices, larger order sizes and newer menu items such as the crispy chicken burger. The company’s shares rose 3% to $243.30 in premarket trading, as the fast food giant’s global same-store sales jumped 12.7% in the third quarter ended Sept. 30, compared with estimates of a 10.31% rise, according to Refinitiv IBES data.
Kraft Heinz Co raised its full-year core profit forecast on Wednesday, as the packaged food maker expects strong demand and increased product prices to counter inflation. Shares of Kraft were up about 2% in premarket trading after the Chicago-based company topped Wall Street estimates for third-quarter revenue and profit.
Coca-Cola Co raised its full-year profit forecast on Wednesday, indicating that higher prices and demand for its sodas across the globe were helping it counter a profit squeeze from supply chain disruptions. The beverage giant’s shares rose 3% in premarket trading as it also beat estimates for third-quarter revenue and profit. Coca-Cola’s revenue surged 16% to $10.04 billion in the quarter, as the reopening of public venues such as theaters, stadiums and restaurants across the world led to a rebound in demand for its soft drinks.
Other earnings today include: Agnico Eagle Mines Ltd.; Alamos Gold Inc.; Automatic Data Processing Inc.; Bristol-Myers Squibb Co.; Capital Power Corp.; Champion Iron Ltd.; EBay Inc.; Ford Motor Co.; Lundin Mining Corp.; Methanex Corp.; Mullen Group Ltd.; Southern Copper Co.; Suncor Energy Inc.; Tamarack Valley Energy Ltd.; Thermo Fisher Scientific Inc.; Waste Connections Inc.; West Fraser Timber Co. Ltd.
Economic news
(8:30 a.m. ET) U.S. goods trade deficit for September.
(8:30 a.m. ET) U.S. wholesale and retail inventories for September.
(8:30 a.m. ET) U.S. durable goods orders for September. Consensus is a decline of 1.0 per cent from August.
(10 a.m. ET) Bank of Canada policy announcement and monetary policy report with press conference to follow at 11 a.m.
With files from Reuters
Darcy Keith