NEWS

Interest rate fears hang over markets, push down dollar

03/11/2015 11:29 EDT | Updated 05/11/2015 05:59 EDT
U.S. and Canadian stock market indexes opened higher on Wednesday after Tuesday’s sharp selloff, but fears of a U.S. interest rate hike hung over the market.

The Canadian dollar continued its fall against the U.S. dollar, trading this morning at 78.37 US cents, its lowest level of the year. A strong U.S. dollar is pushing the loonie lower.

The euro was at its lowest point since April 2003,  as low as as $1.0560 US. The euro is down 23 per cent this year and many traders expect it will fall to parity with the greenback.

And there were further dire warnings over the stock market, with  Deutsche Bank AG analysts David Bianco predicting the S&P index could fall by as much as 9 per cent if the U.S. Federal Reserve raises interest rates in June.

The S&P, a broad index covering 500 stocks representative of the U.S. economy, has been trading at record levels since mid-February on strong corporate earnings and optimistic economic predictions for the U.S.

But it was down 1.7 per cent on Tuesday as all North American stocks sold off.

What’s causing all the worry is the divergent monetary policies by central banks in Canada, the U.S. and Europe.

The Bank of Canada cut interest rates in January in an effort to stimulate the Canadian economy and the European Central Bank has begun an even more extreme stimulus plan, buying up $80 billion Cdn of bonds every month.

Meanwhile, the Fed appears to be heading in the opposite direction. Fed chair Janet Yellen has said she can afford to be patient on rate hikes, but she has set some benchmarks for when she’ll move, among them an unemployment rate of 5.5 per cent.

U.S. joblessness at 5.5%

The U.S. met that target last Friday, with a solid pace of jobs growth that has continued for six months. Other economic indicators also appear to be pushing the Fed to move sooner, rather than later, including strong consumer confidence and a growth rate in the fourth quarter that is somewhere between 2.2 per cent to 2.6 per cent, according to the latest estimates.

Most analysts believe the rate hike will come in June, though the Fed’s open market committee meets next week and may give clearer guidance on its plan.

In anticipation of that day, investors are buying up the U.S. dollar, pushing it up against the euro and the loonie.

They’re also anticipating a hit to U.S. stocks, which have seen a six-year bull run since their low in March 2008.

On Wednesday morning, the S&P was up three points to 2047, the Dow is up 42 points to 17,704 and the Nasdaq gained eight points to 4868.

The TSX was up 21 points at 14,662. Yesterday’s rout took Toronto stocks to the same level they were at at the beginning of the year.

Canadian stocks are more susceptible to the price of oil and other commodities, because the strong mining and energy sectors.

The West Texas Intermediate oil contract was down 69 cents today to $47.60 a barrel, continuing a slide that began late last week.

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