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Energy sector falls to push S&P/TSX lower after inflation hits near 40-year high

TORONTO — Fears of weakened demand stemming from higher interest rates pushed the energy sector and Canada's main stock index lower midweek as inflation hit a near 40-year high in May.
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A sign board displays the TSX outside the Richmond Adelaide Centre in the financial district in Toronto on Wednesday, September 29, 2021. THE CANADIAN PRESS/Evan Buhler

TORONTO — Fears of weakened demand stemming from higher interest rates pushed the energy sector and Canada's main stock index lower midweek as inflation hit a near 40-year high in May.

"Canada has been outperforming other markets this year but not so this week. Energy is seeing a lot of profit-taking and as bond yields pull back we could see a bounce in the oversold tech stocks into quarter end," said Greg Taylor, chief investment officer of Purpose Investments. 

The S&P/TSX composite index closed down 253.25 points to 19,004.04, ending two days of gains. 

Energy was the biggest laggard Wednesday, losing 5.4 per cent as weaker crude oil prices hurt the shares of Canadian producers with Baytex Energy Corp. and Meg Energy Corp., losing 12 and 9.5 per cent, respectively.

The August crude oil contract was down US$3.33 at US$106.19 per barrel after hitting an intraday low of US$101.53. The July natural gas contract was up five cents at US$6.86 per mmBTU. 

The Canadian dollar traded for 77.27 cents US compared with 77.35 cents US on Tuesday.

Taylor said the fear in equity markets this week has centred on recession with the U.S. Federal Reserve seeming ready to accept a recession to deal with inflation. That's hurt commodities, with energy and copper losing ground.

Several large U.S. banks are predicting a growing likelihood of a recession.

Fed chairman Jerome Powell played down recession concerns but told the Senate banking committee the central bank has the “resolve” to tame inflation.

“We’re not trying to provoke and don’t think that we will need to provoke a recession," Powell said. “But we do think it’s absolutely essential that we restore price stability, really for the benefit of the labour market as much as anything else.” 

However, he also said achieving a soft landing for the economy without a recession has become “significantly more challenging.” 

Powell's testimony came a week after the Fed raised its interest rate by 0.75 per cent, its biggest increase in nearly three decades. 

The Bank of Canada is expected to follow suit next month, especially after soaring gas prices helped the annual inflation rate in May soar to its highest level in nearly 40 years.

"This should pretty well guarantee that the Bank of Canada will hike by 75 bps at the next meeting," Taylor wrote in an email.

Materials was also lower as copper sank to its lowest level since February 2021. That pushed Ivanhoe Mines Ltd. and Teck Resources Ltd. each down 9.6 per cent.

The August gold contract was down 40 cents at US$1,838.40 an ounce and the July copper contract was down 9.5 cents at US$3.94 a pound. 

A drop in bond yields pushed financials lower with all large Canadian banks decreasing, led by a 3.4 per cent drop for Laurentian Bank and 2.8 per cent slide for Scotiabank.

Technology was the strongest of three sectors that gained on the day as shares of Shopify Inc. increased 3.5 per cent.

U.S. stock markets also partially recovered from a weak morning start despite ending the day slightly lower.

In New York, the Dow Jones industrial average was down 47.12 points at 30,483.13. The S&P 500 index was down 4.90 points at 3,759.89, and the Nasdaq composite was down 16.22 points at 11,053.08. 

This report by The Canadian Press was first published June 22, 2022. 

Companies in this story: (TSX:BTE, TSX:MEG, TSX:LB, TSX:BNS, TSX:CP, TSX:SHOP, TSX:TECK.B, TSX:IVN, TSX:GSPTSE, TSX:CADUSD=X) 

Ross Marowits, The Canadian Press