Canadian markets are catching up to a global selloff on Tuesday that rocked major stock indices around the world the day before.
The S&P/TSX fell 542 points to start trading on Tuesday, a decline of 2.44 per cent, bringing Canada’s benchmark index to its lowest levels in a month. It had recovered much of those losses through the morning, down roughly 0.8 per cent by 2:30 p.m. ET.
The index also fell nearly 500 points in trading on a tumultuous Friday.
Markets in Canada were closed for a holiday on Monday, meaning Canadian stocks are only now catching up to a global selloff that continued to rock markets worldwide to start the week.
Weak jobs figures released in the United States on Friday stoked trading woes amid renewed fears of a recession hitting the economy. Tech stocks were hit particularly hard in the selloff.
Both the S&P 500 and the Nasdaq Composite posted losses of at least three per cent each in the previous session.
Benjamin Reitzes, BMO’s director of Canadian rates and macro strategist, told Global News on Tuesday that signs of weakness in the U.S. usually creep north of the border, too.
“Where the U.S. goes, Canada goes as well,” he said. “The reality is for Canada that we’re already in a pretty weak state as it is, the unemployment rate here is up more than a percentage point from a year ago, economic growth has been consistently weak for over a year.”
But even as Canadian stocks slipped there were signs of recovery elsewhere on the markets.
Wall Street’s main indices rose in volatile trading on Tuesday, as investors looked for bargains after a rout in the previous session, while dovish rate commentary from Federal Reserve officials also lifted the mood.
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Most megacap and growth stocks, which together lost US$200 billion in market value on Monday, gained as Nvidia bounced back 2.3 per cent.
Apple slipped 1.9 per cent, extending a nearly five per cent drop on Monday after Warren Buffett’s Berkshire Hathaway cut its stake in the iPhone maker by half.
The Nikkei stock index soared on Tuesday in a relief rally after plummeting 12.4 per cent on Monday, its biggest percentage drop since the 1987 Black Monday crash. It ended Tuesday’s trade up 10.2 per cent at 34,675.46.
How should investors react?
Craig Basinger, chief market strategist at Purpose Investments, told the Canadian Press that he doesn’t advise investors to “overreact” to the volatility, attributing it largely to technical factors rather than economic disruption.
“This is, I think, a bit of a mechanical unwinding of a really big trade, which has caused a huge spike in volatility. But for most people, I wouldn’t be recommending abruptly changing positioning or portfolio construction,” Basinger said.
He said last week’s interest rate hike by the Bank of Japan affected what are called “carry trades.” The term refers to when investors borrow money in a market with low interest rates (in this case Japan) and invest those funds in a market with high interest rates that will yield a better return (in this case, the U.S.).
That carry trade has been profitable for the last couple of years, but an interest rate hike in Japan combined with softer U.S. economic data raising the likelihood of an aggressive rate cut by the Federal Reserve has changed that.
“I think there’s just been a pretty big stampede towards the exit for this carry trade that’s been very popular of the last couple of years, and that is what exacerbated a lot of the market moves and weird nuances that were going on yesterday,” Basinger said.
Now the million-dollar question is whether Monday’s market panic is over, or whether there is still more money that needs to come out, he said.
“If this is a mechanical situation where it’s an unwinding of a trade, then that will limit how much it can actually spread,” he said.
“I think you could possibly get some normalcy back in the market. The only risk, of course, is that these were really big moves — there could be some institutions that are sort of further offside now or in greater trouble.”
Reitzes said markets can react a bit more strongly to one or two downbeat data points during the summer, but he believes the recent market volatility does not portend economic ruin for the U.S. or Canada.
Monetary policymakers will react in turn to recent developments, Reitzes noted, with the Bank of Canada already in an easing cycle and many forecasters predicting interest rate cuts could begin in September for the U.S. Federal Reserve. Weak economic data on both sides of the border has markets advancing their bets for interest rate cuts this year and next — in Canada, Reitzes foresees an additional 75 basis points of rate cuts in 2024 to drop the Bank of Canada’s policy rate to 3.75 per cent by year’s end.
Lower policy rates on both sides of the border will take the pressure off the North American economies and equity markets should find some relief when borrowing costs do drop, he said. Further rumblings of a recession in the U.S. could cause more instability, but Reitzes said it’s too early to jump to conclusions about a steep downturn.
“Unless we see continued bad data or softer data out of the U.S., things are probably going to stabilize a little bit from here,” he said.
“The recent volatility is a reason for some caution. But it is not at all time to panic at this point.”
— with files from Reuters and the Canadian Press