Gains in the energy sector as the price of oil rose above US$80 a barrel helped Canada’s main stock index surge more than 400 points higher on the first day of the fourth quarter, while U.S. stock markets also climbed higher.
The S&P/TSX composite index was up 436.97 points or 2.4 per cent at 18,881.19.
Markets started to rebound Monday after a tough third quarter, said Angelo Kourfakas, an investment strategist at Edward Jones.
“That is with the help of lower bond yields, which are helping fuel the rally,” he said.
In New York, the major indexes all gained more than two per cent. The Dow Jones industrial average was up 765.38 points at 29,490.89. The S&P 500 index was up 92.81 points at 3,678.43, while the Nasdaq composite was up 239.82 points at 10,815.44.
In the current volatile market, investors are interpreting every economic release through the lens of what it might mean for the central banks’ tightening campaign, said Kourfakas.
“The market thinks that the Fed won’t be able to hike as much as they are now communicating because the economy is weakening at a fast pace, or is about to weaken.”
Any sign that inflation is behind us is cause for optimism among investors that the Bank of Canada and Federal Reserve might ease off, he said.
“Of course, this will have to be confirmed by lower inflation readings to come. But that’s really the premise behind the rally today.”
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The Canadian dollar traded for 73.20 cents US compared with 72.96 cents US on Thursday.
The November crude contract was up US$4.14 at US$83.63 per barrel and the November natural gas contract was down 30 cents at US$6.47 per mmBTU.
Oil was back in the news as prices rose Monday, likely in reaction to news that the OPEC-plus alliance is considering production cuts this week, said Kourfakas. Also driving oil prices up is the fact that the U.S. Strategic Petroleum Reserve is expected to stop releasing extra supply into the market soon, he said.
This energy rally has also nudged the Canadian dollar back up above 73 cents US, said Kourfakas.
“We know there’s a close relationship between the loonie and oil prices,” he said, though an easing in interest rate expectations for the Federal Reserve and its affect on the U.S. dollar is also likely a factor in releasing some of the recent pressure on the Canadian currency.
The December gold contract was up US$30 at US$1,702 an ounce and the December copper contract was largely unchanged at US$3.41 a pound.
Looking ahead to the last quarter of the year and into 2023, Kourfakas is looking for signs of a more sustainable rebound: a series of moderating inflation data for several months in a row, and a peak for long-term bond yields.
“Potentially, I think we’re going to see more volatility continue, but with valuations having declined … that can set the stage for eventual recovery,” he said.
“And now, with sentiment being so pessimistic, it is probably a good time to ask the question: What can go right? Because a lot has gone wrong until now.”