Market Quote: Canada’s Equity and Bond Markets Climb Higher on Rate Cut
Author: The editor's desk
June 5, 2024
A mid-week analysis of what’s happening in global financial markets from the perspective of AGF’s investment management team.
One Down
The Bank of Canada’s (BoC) decision to cut its target interest rate by 25 basis points on Wednesday marks its first rate cut since 2020 and makes it the first G7 country to begin its easing cycle. The market expects the European Central Bank to make its first cut tomorrow, with the U.S. Federal Reserve widely expected to remain on hold at its meeting next week.
From an equity market perspective, we believe that lower rates generally benefit interest-sensitive sectors, dividend payers, small capitalization stocks, and companies with elevated debt leverage. This can be seen in the performance of the S&P/TSX Composite Index following the BoC’s announcement, with strength in areas like Real Estate, Utilities, and Pipelines, despite surprising underperformance in Telecommunications.
Many of these interest-sensitive sectors had rebounded over the past month as market odds for Wednesday’s rate cut climbed; however, they remain significant laggards on a 12-month basis and still represent attractive opportunities in an era of falling interest rates.
More To Go?
Canadian bond yields decreased significantly on Wednesday despite the Bank of Canada’s announced rate cut being largely ‘priced in’ beforehand. The country’s government bond market now anticipates a 60% chance of consecutive cuts starting in July and seems particularly focused on the BOC’s increased confidence in achieving its 2% inflation target due to the downward direction of price levels in recent months.
Still, we believe that expectation may not fully account for the central bank’s relatively balanced tone when speaking about the potential of further easing ahead. As Tiff Macklem, the BoC Governor reiterated multiple times during his press conference, the central bank’s decision to cut again in July will remain data-dependent and be heavily reliant on the next two Consumer Price Index (CPI) reports.
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