Canadian stocks re-enter correction territory amid rate hike nerves

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  • TSX drops 2% to 19,867.43
  • The materials group fell by 3.3%; technology drops 3.6%
  • The Canadian dollar weakens by 0.6% against the greenback
  • 10-year yield climbs to 11-year high at 3.486%

TORONTO, June 13 (Reuters) – Canada’s main stock market slipped back into correction territory on Monday and the dollar weakened against its U.S. counterpart as investors bet on higher central bank interest rates to fight inflation.

The Toronto Stock Exchange’s S&P/TSX Composite Index (.GSPTSE) fell 2% to 19,867.43, leaving it 10.1% below the record close set in March.

A correction is confirmed when an index closes 10% below its closing high. The TSX did this on May 11-12, but then rebounded.

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The Canadian dollar was trading down 0.6% at 1.2862 against the US currency, or 77.75 US cents, as the safe-haven US dollar appreciated against a basket of major currencies. It hit its lowest level since May 25 at 1.2880.

Wall Street’s benchmark S&P 500 (.SPX) was also down sharply after searing US inflation data on Friday made investors nervous that the Federal Reserve would not would not be able to control price pressures without triggering a recession. Read more

The US central bank is due to make an interest rate decision on Wednesday.

“Central banks are doing all they can to show they’re not afraid to raise interest rates perhaps more aggressively than people have assumed until now,” said Michael Sprung, chairman of Sprung Investment Management.

Money markets see a roughly 75% chance that the Bank of Canada will raise interest rates by three-quarters of a percentage point next month, which would be the biggest hike since August 1998, and expect rates peak at around 3.9% next year.

Just two weeks ago, investors were expecting a so-called terminal rate of around 3%.

“I think what we’re starting to see is maybe the start of some market capitulation,” Sprung said.

The Toronto market has fallen less than some other major benchmarks this year, helped by its heavy weighting in resource stocks.

But the energy sector lost some recent gains on Monday, down 1.8%, while the materials group, which includes precious and base metal miners and fertilizer companies, lost 3. 3% due to falling gold prices.

Tech stocks, which are particularly sensitive to higher rates, fell 3.6%, as shares of cloud-based trading platform company Lightspeed Commerce Inc (LSPD.TO) fell more than 12% .

Yields on Canadian government bonds rose across the curve, following the performance of US Treasuries. The 10-year rose 13.3 basis points to 3.486%, its highest since April 2011.

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Reporting by Fergal Smith Editing by Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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