Vikki Zhao and Olena Li
PUBLISHED Mon, May 6, 2024, 11:30 AM EST. 6 min read.
This week in financial news, April marked a sharp decline for major stock indices with the S&P 500, Nasdaq, and Russell 2000 all seeing significant drops, driven by persistent inflation and rising bond yields. However, Amstar analysts remain optimistic, projecting potential stock valuation boosts as inflation eases and the Fed potentially lowers interest rates.
On the business front, Canada’s largest grocer, Loblaw, raised its dividend by 15%, and electric vehicle maker NIO reported a surge in orders, boosting their stocks. Conversely, Tesla and Apple saw declines, with Tesla experiencing a corporate shakeup and Apple facing a sell-off by Warren Buffett. Additionally, Canada’s economic growth disappointed in February, raising expectations for a rate cut by the Bank of Canada. Global markets reacted to Chairman Powell’s remarks, influencing mortgage rates and oil prices, while gold prices spiked due to geopolitical tensions.
April ended as the weakest month for stocks since last September. The S&P 500 dropped by 4.5%, the Nasdaq Composite by 4.8%, and the Russell 2000 by 7.0% since the end of March. The main negative drivers were persistent inflation, leading to revised expectations for the Federal Reserve, and rising bond yields.
Looking at the bigger picture, the positives seem to outweigh the negatives. The economy is resilient, supported by fiscal stimulus and strong employment numbers. The tight labor market continues to contribute to job growth, fueling economic expansion and corporate profits.
Amstar’s analyst anticipates inflation to decrease, although more unevenly than preferred, partly due to economic strength. Over the next year, as inflation eases, we expect the Fed to eventually reduce interest rates, which should lower bond yields and boost stock valuations. Assuming a smooth economic adjustment, our target for the S&P 500 by the end of the year is between 5100 and 5600.
Technically, the S&P 500 is maintaining a strong intermediate-term uptrend after reaching new highs in January, which historically suggests a likelihood of further price increases over the next year.
Overall, we view the current market conditions positively.
In the short term, Investors might see continued volatile trading. The S&P 500’s recent recovery faced resistance at the 50-day moving average of 5127. With significant down-volume and a high ratio of decliners to advancers, it is indicating that the pullback may extend further in price or time.
The diminishing momentum suggests that achieving significant market strength soon will be challenging. Amstar’s analyst recommends investors recognize that pullbacks are typically gradual. In the absence of quick inflation adjustments or Fed action, the stock market may experience more bounded fluctuations in the upcoming weeks or months. Key support levels to watch are 4953 (April’s low) and a strong support at 4800 (the breakout point to new all-time highs).
Overall, Amstar’s analyst considers the current market retracement to be normal, view it as a healthy adjustment after the S&P 500’s 28% surge from October to March, and see this consolidation phase as an opportunity.
Key points to monitor include the focus on inflation and Fed policies, especially with today’s Federal Open Market Committee (FOMC) announcement. With market expectations now reduced to just one rate cut this year, down from six in January, it will be crucial to hear the Fed Chair’s insights and observe how the bond market reacts.
Additionally, the upcoming April jobs report on Friday will provide updates on employment and wages, and we are hoping for a lower-than-expected increase in wages. Bond yields, which have regained their inverse relationship with equities recently, are likely to continue posing challenges to stock prices if they keep rising.
From a contrarian perspective, the current bearish sentiment and low expectations for a Fed rate cut could provide room for positive surprises if outcomes are better than anticipated.
GOOD NEWS
Good news for Loblaw Cos. Ltd. shareholders: Canada’s largest grocer raised its quarterly dividend by 15 per cent to 51.3 cents per share while reporting first-quarter revenue increased by $586 million to $13.6 billion.
Good News for NIO Shareholders: Before Monday’s (May 6th) US stock market trading, NIO (NASDAQ: NIO) surged over 7%, with the company recently announcing that from April 18th to May 5th, cumulative orders for the NIO L6 have exceeded 41,000 units.
Good news for Virgin Galactic shareholders: Virgin Galactic (SPCE.US) stock surged over the weekend, with shares up more than 11.5%, closing at $1.058. The company’s Delta-class spacecraft ground testing facility has commenced operations.
Good news for oil company investors: The 1,150-kilometre Trans Mountain pipeline expansion connecting Alberta and British Columbia officially opened on Wednesday, giving producers such as Cenovus Energy Inc. a “pretty vast” opportunity to access better prices and newer markets. The S&P/TSX capped energy index is up almost 20 per cent this year.
Good news for market bulls: The S&P 500 rebounded last week and some investors say it can push further ahead based on the market playbook of the 1990s, when equities more than tripled in value despite years of rates that were hovering around current levels.
Good news for Shake Shake enthusiasts! Shake Shack is set to open its first Canadian location in Toronto this summer, announcing the launch of an “exclusive to Toronto” milkshake, sparking a rise in stock prices.
BAD NEWS
Bad news for Tesla Inc. shareholders: After a week of renewed optimism, the electric-vehicle maker’s stock declined 1.9 per cent on Wednesday after chief executive Elon Musk shut down its Supercharger division, dismissed two senior executives and fired hundreds more staff.
Bad News for Apple Shareholders: Buffett Reveals Reduction in Apple Holdings at Berkshire Hathaway Shareholders Meeting, Citing Tax Concerns, Despite Continued Praise for Company.
Bad news for Air Canada shareholders: The airline reported a first-quarter loss that exceeded market expectations this year, attributed to rising costs and subdued demand, causing its stock to drop by 9% on Thursday.
Bad news for uranium mine investors: Canadian uranium producer Cameco (CCO.TO) (CCJ) saw its stock price fall last week due to the company’s latest quarter turning into a loss. In the three months ending March 31, the company reported a net loss of $7 million, compared to a profit of $119 million in the same period last year.
Canada’s February GDP Growth Falls Short, Heightening Rate Cut Expectations
Canada’s February gross domestic product (GDP) growth disappointed, expanding by 0.2%, below both analysts’ estimates and Statistics Canada’s forecast, indicating a slowing economy. Of particular concern was the decline in GDP per capita, down by three percent from its peak, a trend not seen outside of a recession according to economists. National Bank of Canada and Royal Bank of Canada both highlighted the concerning trajectory of GDP per capita, with RBC estimating a seventh consecutive decline. The weakening economy is evidenced by rising unemployment rates despite quarterly growth, suggesting underlying fragility. With inflation decelerating and economic growth expectations dim, calls for a Bank of Canada rate cut this summer are growing louder, as overly restrictive monetary policy risks further economic strain.
Governor Tiff Macklem told lawmakers this past week that Canada’s central bank can cut its interest rate ahead of the Fed, but there are limits. Bank of Montreal’s chief economist Douglas Porter reckons the Bank of Canada can probably cut interest rates twice ahead of the Fed before the Canadian dollar really feels the pain.His chart maps out out the history of Canadian and U.S. short-term rates, showing the biggest gap was in the early 1990s when it widened to more than 5 percentage points. Over the past 50 years the median spread was 50 basis points, but since 2000, it’s been less than 15 bps, said Porter. The gap tightened further after the great financial crisis, with the spread never reaching 100 bps in either direction since late 2008, he said. “We would view the experience of the past 15 years as setting the reasonable limits to which the BoC could deviate without causing undue stress on the currency,” said Porter in his note.
“With the spread already starting around -33 bps, that gives the BoC room for roughly two independent cuts.”
Toronto Housing Market Sees Spring Slowdown, Buyers Gain Leverage Amid Increased Listings
The Toronto housing market sees a spring slowdown with increased listings favoring buyers, though sales decreased by five percent compared to last year. The rise in inventory stabilized prices, particularly in the condominium segment, which experienced a substantial increase in new registrations. Despite increased listings, condominium sales declined by 6.5 percent year over year in April. However, TRREB anticipates sales to pick up as homeowners await potential rate cuts by the Bank of Canada. The increased inventory has resulted in minimal price movement, offering buyers more negotiating power, with average prices showing modest increases or declines across different housing types in April.
TD Bank Is Facing A Double Regulatory Blow
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) fined TD Bank approximately $9.19 million for failing to report suspicious transactions, violating the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This penalty comes after TD Bank set aside $450 million for an ongoing investigation into its anti-money laundering controls in the United States. While the exact amount of the fine is yet to be determined, the increased regulatory scrutiny could impact TD Bank’s capital ratio and long-term costs. These investigations have also led to a drop in TD Bank’s stock price and affected its previous merger plans.
Powell’s Remarks Boost Mortgage Rate Market, TD Bank Slashes Variable Rate
Chairman Powell’s speech has filled the mortgage market with hope, as the U.S. economy remains strong. However, he indicated that the next policy adjustment might not involve a rate hike, leading to a widespread decrease in government bond yields, which is favorable for short-term fixed rates. Meanwhile, the notable move by TD Bank, significantly slashing uninsured variable rates, has brought the market its best discount in history, impacting the direction of the Canadian mortgage market.
Oil Price Plunge Raises Concerns over US Restocking
Last week saw the largest single-week decline in oil prices in three months, with Brent crude falling over 7% and US WTI crude dropping by 6.8%. Investors fear that higher long-term borrowing costs will dampen economic growth in the United States, the world’s leading oil consumer. Additionally, geopolitical risk premiums in the Israeli-Palestinian conflict have decreased as both sides consider a temporary ceasefire and engage in talks with international mediators. On the other hand, investors also need to watch whether the oil price decline will prompt the US government to replenish its strategic reserves.
Gold Surges to $2330 Amid Geopolitical Tensions
Gold prices spiked to $2330, driven by heightened geopolitical tensions and increased risk aversion. Investors turned to gold as a safe-haven asset during Monday’s US session, amidst concerns over global instability and expectations of US interest rate cuts. The positive sentiment was further fueled by softening economic data and the Fed’s stance on inflation. Despite recent signs of easing tensions in the Middle East, renewed conflict concerns between Israel and Hamas could sustain demand for gold as a safe-haven asset. Additionally, China’s strong demand for gold, indicated by PMI data, and continued central bank purchases support the bullish trend. Technical analysis suggests potential range-bound trading with support around $2280 and resistance near $2353. Investors should remain cautious and monitor key levels for trading opportunities amidst geopolitical uncertainties.
China’s April Service Sector Growth Slows Slightly, Caixin PMI Shows
April saw a slight slowdown in China’s service sector activity, according to the latest Caixin PMI data released on Monday. The Caixin Services Purchasing Managers’ Index (PMI) for April was 52.5, slightly lower than March’s 52.7, indicating a relatively stable pace but with a minor dip. This resilience is attributed to increased business activities and improved export demand, partly due to sustained stimulus and policy support, as well as the global economic recovery leading to an increase in inbound tourist numbers, thus boosting service exports.
- On Friday (the 10th), the United States will release consumer confidence data, expected to provide some new insights into inflation expectations and economic prospects.
- The Bank of England will hold its interest rate decision on Thursday, looking for signs of whether policymakers intend to cut rates in the coming months.
- The Reserve Bank of Australia will hold its latest policy meeting on Tuesday, following stronger-than-expected first-quarter inflation data and indications of continued strength in the employment market.
- Shopify Inc. to announce first-quarter results before markets open on Wednesday, with CEO Tobi Lütke and president Harley Finkelstein expressing criticism of recent capital gains tax changes.
- Bank of Canada to issue Financial System Review on Thursday morning, assessing vulnerabilities and risks to the Canadian financial system.
- Statistics Canada to unveil April’s labour force survey on Friday morning, following a rise in unemployment to 6.1% in March.
The first-quarter earnings season is entering its final stages, with several major companies set to report earnings this week, including Disney (NYSE: DIS), Wynn Resorts (NASDAQ: WYNN), and Akamai Technologies (NASDAQ: AKAM).
Among small-cap companies, health supplement company Bellring Brands (NYSE: BRBR), gambling firm Light & Wonder (NASDAQ: LNW), and oil and gas company Permian Resources (NYSE: PR) will also be releasing their earnings reports.
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