This week in the markets


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Stocks retreat as inflation worries percolate

February 19, 2021

Growing worries about potential inflation pressured North American stock prices, and sent yields on government bonds to their highest levels since February 2020. Equities began the week rallying as new COVID-19 cases fell, vaccine distribution ramped up, and most economic data pointed to a strengthening recovery. The S&P/TSX Composite, S&P 500, Nasdaq Composite and Dow Jones Industrial Average indices all touched record highs Tuesday. However, stocks reversed course and declined after inflation measures in both the US and Canada raised concerns that rising commodity prices and borrowing costs would soon weigh on corporate profit growth and the relative attractiveness of equities.

Inflation fears took centre stage after the US Producer Price Index in January posted its largest monthly increase since 2009. Canada’s Consumer Price Index stepped up to its highest rate of increase since last February. Meanwhile copper prices climbed to their highest level in almost nine years, lumber futures — buoyed by a robust housing market — jumped to an all-time high, and West Texas Intermediate crude oil (WTI) rose briefly to its highest price in more than a year, helped by the deep-freeze in Texas that caused many refiners to shut down. WTI dropped at week’s end as Texas operations resumed and Saudi Arabia announced plans to reverse production cuts. As yields moved higher, the price of gold slid to an eight-month low.

The decline in Canada’s benchmark TSX was led by the materials sector, which was lower due to falling gold prices. The consumer staples sector was also weaker. The energy, financials, consumer discretionary and health care sectors gained ground. Energy stocks benefited from the strength in oil prices and financials reacted positively to higher interest rates and bond yields, which tend to be supportive of bank profitability. The discretionary sector was higher, despite a reported drop in December Canadian retail sales, after auto-parts maker Magna International Inc. reported better than expected earnings. The small but volatile health care sector was higher as several cannabis companies climbed in response to producer Tilray Inc. reporting stronger than expected quarterly results. Tilray plans to merge with fellow Canadian marijuana producer Aphria Inc. next quarter.

Technology weighed heaviest on the S&P 500. Fast-growing tech companies are especially sensitive to inflation pressures because most of their value derives from future earnings. The health care and utilities sectors were also lower. As they did in Canada, the energy and financials sectors made gains. Initial unemployment claims were higher than expected, but most other data suggested a remarkably strong US economy. Retail sales surged much more than expected in January, with even more aggressive fiscal stimulus likely in the coming weeks. Industrial production rose at twice the expected rate, and building permits — a leading indicator of housing starts — jumped to their highest level since 2006.

European and Asia-Pacific markets were mixed. Italy and Germany retreated, while France and the UK made modest gains. Japan’s Nikkei 225 Index rallied to its highest level since mid-1990, after the country reported a much stronger than expected fourth quarter gross domestic product (GDP) and the manufacturing purchasing managers’ index climbed in February at its fastest pace since 2018.

 

What’s ahead next weeks:

Canada

  • Industrial Product and Raw Materials Price Indices (January)

U.S.

  • Conference Board Leading Indicator (January)
  • Conference Board Consumer Confidence Index (February)
  • New home sales (January)
  • Durable goods orders (January)
  • Gross Domestic Product (4th Quarter)
  • Personal income and spending (January)
  • Univ. of Michigan Consumer Sentiment Index (February)

This weeks market closing values

EQUITY INDICES Level Change 1-week YTD 1-year 5-year
      CAD CAD CAD CAD
S&P/TSX 18,384.27 - 75.94 - 0.41% + 5.45% + 2.56% + 7.49%
S&P 500 3,906.71 - 28.12 - 1.36% + 2.71% + 9.90% + 13.24%
DJIA 31,494.32 + 35.92 - 0.53% + 1.61% + 2.22% + 11.92%
FTSE 100 6,624.02 + 34.23 + 1.05% + 4.00% - 8.15% - 0.11%
CAC 40 5,773.55 + 69.88 + 0.60% + 1.87% + 1.12% + 6.37%
DAX 13,993.23 - 56.66 - 1.01% - 0.60% + 8.62% + 8.22%
Nikkei 30,017.92 + 497.85 + 0.55% + 5.78% + 28.95% + 12.88%
Hang Seng 30,644.73 + 471.16 + 0.84% + 11.13% + 5.81% + 7.80%
CURRENCY RETURNS CAD Change 1-week YTD 1-year 5-year
US$ 1.2622 - 0.0074 - 0.58% - 0.81% - 4.53% - 1.72%
Euro 1.5291 - 0.0092 - 0.60% - 1.63% + 7.04% - 0.04%
Yen 0.0120 - 0.0001 - 1.08% - 2.90% + 0.81% - 0.42%
CANADIAN TREASURIES Yield Change COMMODITIES USD Change
3-month 0.08 + 0.01 Oil $58.98 - $0.49
5-year 0.64 + 0.15 Gold $1,781.66 - $42.57
10-year 1.21 + 0.18 Natural Gas $6.61 - $0.00