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Apr 11, 2022

Lower oil prices pull down energy sector and TSX to start week

Foreign investors should be looking at Canada with a lot more interest: Strategist

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Crude oil prices fell to their lowest level since before the Russian invasion of Ukraine as a spike of COVID-19 cases in China pulled down the energy sector and Canada's main stock index to start the trading week.

China's zero-tolerance policy toward COVID cases has resulted in extended lockdowns in Shanghai, its second-largest city with some 25 million people, following the reporting of record cases over the weekend.

"We have seen air traffic in China decline so the impact for consumption of jet fuel, gasoline, etc., at least in the near-term is impacting the demand outlook. And really China is a big player in that space because it is the largest crude oil importer," said Angelo Kourkafas, investment strategist at Edward Jones.

The energy sector lost 2.6 per cent on the Toronto Stock Exchange with Cenovus Energy Inc. decreasing 5.8 per cent as crude prices fell to their lowest level since Feb. 25.

The May crude contract was down US$3.97 at US$94.29 per barrel and the May natural gas contract was up 36.5 cents at US$6.64 per mmBTU. 

While lower crude prices provides some welcome relief for motorists, it pushed the S&P/TSX composite index to close down 83.86 points to 21,790.49.

In the U.S., stock markets lost ground as growth sectors like technology fell as bond yields rose to a three-year high in anticipation of aggressive monetary policy tightening. The 10-year treasury bond yield increased to as much as 2.793 per cent.

In New York, the Dow Jones industrial average was down 413.04 points at 34,308.08. The S&P 500 index was down 75.75 points at 4,412.53, while the Nasdaq composite was down 299.04 points at 13,411.96.

The 10-year Canadian government bond yield rose to as much as 2.178 per cent, its highest level since the end of 2013. The increase was in anticipation that the Bank of Canada will raise rates by half a percentage point on Wednesday. It follows Friday's labour market survey that showed Canada's unemployment rate fell to the lowest on record in March while wage growth is picking up.

"We think both the Fed and the Bank of Canada are likely to deliver what I would say are supersized rate hikes," Kourkafas said in an interview.

While the tech sector fell 1.8 per cent in the U.S. it was down only slightly in Canada as losses were partially offset by shares of Shopify Inc. increasing 2.9 per cent after the Ottawa-based company announced a 10-for-one stock split.

Nine of the 11 major sectors on the TSX were lower.

Consumer staples and materials were higher, the latter helped by higher gold prices.

The June gold contract was up US$2.60 at US$1,948.20 an ounce and the May copper contract was down 9.1 cents at US$4.63 a pound. 

The Canadian dollar traded for 79.23 cents US compared with 79.43 cents US on Friday. 

Possible market catalysts this week are a U.S. inflation report on Tuesday and the Bank of Canada rate decision on Wednesday.

Investors will also be waiting for the start of earnings season with the reporting of first-quarter results by several U.S. banks.

"There is expectation that all these companies, because the high input costs and higher labour costs, they're going to experience some margin pressures, so it's going to be interesting to see the resilience of the corporate sector," said Kourkafas.

"So we may be in a little bit of holding pattern as we're waiting for these events to unfold."

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