KORNER REPORT / Market Kommentary
Markets Struggle Under Brazilian Battering
A currency scare in Brazil thundered across North American stock markets Wednesday, awakening the economic disquiet that afflicted the global economy in 1998. Investors were rocked by news that Brazil devalued its currency, raising fears of a recession in Latin America.
''Brazil having a problem brings back memories of the problems we had last year and investors are jittery about that,'' said Paul Devlin, vice president at MMA Investment Managers Ltd., which oversees assets of C$600 million. ''Investors are wondering if Brazil is a harbinger of more bad news in other difficult markets like the Far East, Japan and Russia.''
Brazil is important to U.S. and Canadian markets because it is a huge importer of U.S. goods, and because a bad stumble in its economy could send emerging markets tumbling throughout Latin America.
"Brazil is a big part of the Latin American economy, and the economy in Latin America is pretty important to companies in the United States," said Bill Meehan, market strategist at Canter Fitzgerald in Stamford, Conn.
Brazil's stock market opened in a freefall, with the Bovespa index dropping 10 per cent, triggering a circuit breaker that halted trading temporarily. The index was down 3.9 per cent in late afternoon. In Mexico, the IPC index was down 4.2 per cent.
U.S. banks have an estimated $70 billion US in loans in Brazil, while many American and European companies depend on Latin America as a major export market.
The impact on Canada will likely come in the form of lower prices for commodities such as base metals, of which Latin America is a major producer. The fear is that Brazil could try to export its way out of a recession by flooding the market with resources, pushing prices for metals, lumber and other commodities even lower.
"It's a useful reminder that there are still risks out there," said Peter Drake, vice-president of economic research. "Obviously people would rather forget about the risks."
"It seems like the financial world has gone cuckoo again," said Jeff Cheah, a currency analyst at Standard & Poor's MMS in Toronto.
"When you get an environment where fear becomes a dominant rational decision making process, the first ones to bail out of risky investments are going to score huge points."
In New York, the Dow Jones industrial average began the day with a loss of more than 260 points but managed to recover somewhat, finishing 125.12 points lower at 9,349.56. Declining issues led advancers 2-1 on the New York Stock Exchange, where volume was heavy.
The Nasdaq and Standard and Poor's 500 composites both opened lower and sank in early trading and moved up into positive territory in the afternoon, but sank back near the close.
Broad indexes recovered along with Internet-related stocks, which continued to show some resiliency. Yahoo!, Amazon.com and America Online all pared their losses. In Nasdaq trading, Intel and Microsoft were higher on the day.
Canada's leading stock index, the Toronto Stock Exchange 300 composite, opened more than 190 points lower before clawing its way back. By day's end the Toronto Stock Exchange 300 Composite Index was down 68.84 points or 1.03 percent to 6631.99 points. Toronto turnover was hefty at 116 million shares worth C$2.4 billion. Decliners nearly doubled advancers 656 to 333 with another 254 issues unchanged.
"The TSE was down 215 points at its worst ... but we managed to pare those losses," Beattie added. "There's so many bulls out there that they're taking any loss as an opportunity (to buy)."
The S&P/TSE 60, an index of 60 blue chip stocks, was down 3.96 points, or 1.02 percent, to 384.08.
The TSE 100 lost 4.29 points to 405.39.
Today's fall, the third straight, comes after stocks rebounded last week from a summer decline. They were boosted by hopes that world economic prospects were brightening and that Brazil, with the help of an International Monetary Fund aid package, would sort out its financial troubles and avoid the kind of turmoil that beset Asia and Eastern Europe.
''The wildcard has always been Brazil,'' said Rick Hutcheon, chief investment officer at CentrePost Group of Mutual Funds with C$250 million of assets. ''This happened at the worst time in a market that is already overextended.''
Only three of the TSE 300's 14 sub-groups managed a gain Wednesday.
Communications and media stocks were up 0.09 per cent, thanks to Rogers Communications B shares, up 85 cents to $18.80. Consumer products gained 0.5 per cent and utilities rose 0.2 per cent.
Rogers Cantel Mobile Communications gained $1.25 to $22.60; Bell Canada parent BCE Inc. ended the day at $60.05, up 80 cents.
Spooked stock market investors embarked on what market watchers call a "flight to quality" -- taking money out of riskier investments and opting for the security of U.S. and European government bonds.
Optimism about cost-cutting and consolidation in the phone-equipment industry helped rescue the index from its earlier 200 point drop.
Northern Telecom Ltd. rose C$0.35 to C$80.55. North America's second largest phone-equipment maker behind Lucent Technologies Inc. plans to cut 10 percent of its workforce and sell plants to concentrate on Internet-connection gear. Northern Telecom expects to save US$250 million to US$300 million a year.
BCE Inc., which owns 41 percent of Northern Telecom, rose C$0.80 to C$60.05. Canada's largest phone company today made Scotia Capital Markets' list of the top 10 Canadian stocks for 1999, with a 12-month price target of C$70.
Newbridge Networks Corp. rose C$2.50 to C$55.10. Newbridge is in the same business as Ascend Communications Inc., which agreed today to be bought by Lucent for US$20 billion in stock.
Hardest hit in Toronto were transportation and environmental services stocks, down three per cent as Laidlaw Inc. lost $1.30 to $13.90. Waste hauler Philip Services Corp. was dealt another blow on Wednesday as the New York Stock Exchange decided to extend its trading halt and review the company's continued listing status. But Philip reopened after a halt in Toronto, where it fell C$0.11 to C$0.42 by the close.
Banks were also hurt as the financial services sub-group retreated 2.6 per cent. Royal Bank shed $3 to $78.10, while Canadian Imperial Bank of Commerce dropped $1.60 to $37.65. Bank of Montreal slipped $1.10 to $64.50. Bank of Nova Scotia, which has the greatest presence of any Canadian bank in Latin America, fell C$0.85 (US$0.56) to C$31.60. Combined, bank and financial services stocks wiped 39.2 points from the TSE 300.
''This is a small world we live in and the whole banking system does get impacted,'' said Gerry Brockelsby, a partner at Marquest Investment Council Inc., which runs assets of C$1.04 billion. The top six Canadian banks have C$3 billion of loans, deposits and securities in Brazil.
''Canadian banks' direct risk to Brazil is not very significant,'' said Hugh Brown, a bank analyst at Nesbitt Burns Inc. in Toronto. However, the ''greater meaning is what it means for the rest of Latin America and it could be construed as another reason why a recession might hit North America.''
Bombardier Inc., which counts South America and Mexico as its fifth largest market for products such as trains and aircraft, fell C$0.70 to C$21.50.
Mines and minerals dropped 2.1 per cent; Alcan Aluminium fell $1.70 to $42.40 while Cominco Ltd. fell 90 cents to $18.50.
Todd Kapala, an investment specialist at Priority Brokerage, said the resource-based sectors were particularly hard hit by the uncertainty in Brazil. Investors fear that should the problem in Brazil continue, the demand for commodities could lessen.
Oil producers fell as the price of oil dropped almost 6 percent after a report showed surprisingly big increases in U.S. stocks and revived concern over excess supply. Canadian Occidental Petroleum lost $0.85 to $16.15, Computalog fell $0.60 to $6,35, Renaissance Energy lost $0.50 to $18.90, Gulf Canada Resources Ltd. fell $0.25 to $4.75 and Petro-Canada fell $0.25 to $17.85.
''Brazil is bad news for commodities, it means another major economic engine falters, so where's the growth? All we're seeing is more and more supply and less and less demand,'' Hutcheon said.
More Toronto stock market losses could be in the offing on Thursday, if overseas markets plunge.
"The markets are pretty fragile right now so we're at risk," Beattie added.-----------
Sector Review
The value of Canada's auto parts stocks dropped to their lowest point in 10 weeks Wednesday as the sector was caught up in Wednesday's equity market downdraft.
The Toronto Stock Exchange's autos and parts subgroup was down 405.60 points, or 2 percent, to 19845.64 at midday when the benchmark TSE 300 Composite Index was down 78.35 points, or 1.17 percent, at 6624.50 in the aftermath of the resignation of the chief of Brazil's central bank.
Canada's automotive and parts industry is the sixth largest in the world and employs about 500,000 workers.
But the latest figures were better than the subgroup's opening of 19556.99 points, down 3.4 percent, in line with the TSE 300's opening 3.1 percent lower at 6493.30 points.
The sector ended at 19346.52 on October 26.
''The market's really awful today, almost all the stocks that I cover are down fairly sizably,'' one auto sector analyst said.
The subgroup consists of Vancouver-based fuel-cell maker Ballard Power Systems Inc. which was down C$1.05 at C$41.25, Guelph, Ontario-based Linamar Corp. , which shed C$1 to C$27 and Aurora, Ontario-based Magna International Inc. , which lost C$0.75 to C$93.50.
''Linamar's a high (price-to-earnings) multiple stock and high multiples are more vulnerable to market events because what you're saying is you're expecting high growth going forward and if the economy slows down it's difficult to have high growth,'' the analyst said.
Ballard Power, which is developing environmentally friendly fuel cells with transport applications, has a price-to-earnings ratio of 4,230 to one while Linamar, a precision tooling and auto parts maker, has a ratio of 22.76 to one.
Magna, a diversified auto parts maker that has benefited from expansion into hydro-forming technology, has a price-to-earnings ratio of 14.13 to one.
Oakville, Ontario-based Ventra Group Inc. , was only down C$0.25 at C$3.80. It has a price-to-earnings ratio of 11.57 to one.
''Ventra Group has a lower multiple (than the other parts makers) because it has more debt and historically hasn't had a high internally generated growth rate,'' he added.
Canadian Dollar Slips But Avoids Sell-Off On Brazil
The Canadian dollar lost some of its recent gains but avoided a major sell-off after Brazil surprised foreign-exchange markets on Wednesday by devaluing its currency.
Brazil, mired in financial crisis, devalued its currency by 8 percent on Wednesday and the country's central bank president said he would resign. The moves prompted fears of further declines in already fragile commodity prices and a morning sell-off of commodity-based currencies.
Canada's dollar sank almost 1.5 U.S. cents, but rebounded in afternoon action to close Wednesday trade at 65.66 U.S. cents, down slightly from Tuesday's close of 66.07 U.S. cents.
"There was a knee-jerk reaction from the Canadian dollar on the expectation commodity prices would plunge," said Andrew Spence, senior economist at Deutsche Bank Securities.
"I would think the commodity price impact from Brazil will be somewhat limited and the overall impact on the Canadian dollar will also be limited," he added.
Traders called the currency's morning sell-off "healthy" after two weeks of solid gains. The dollar had climbed from 64.47 U.S. cents on December 31 to a four-month high of 66.45 U.S. cents on January 11.
"It's a very good correction and I don't think it means the rally is necessarily over," a foreign-exchange trader in Montreal said.
"Commodity prices were slowly rising, and the trend could continue after the Brazil shock wears off. It's a very good sign for the Canadian dollar that it came back so quickly," he added.
Investors moved to safe-haven currencies and stock markets tumbled on the news from Brazil, but analysts said the global economy was far better prepared than when Russia devalued its currency last September. A series of interest rate cuts from Canada, the United States and Europe have helped stabilize financial markets. Markets have also long considered the Brazilian currency, the real, overvalued.
"I wouldn't want to play down what happened today, Brazil is a major economy, but the international community was well prepared," said Spence.
"Monetary policy has eased considerably in the industrial world in the past year and the Japanese have taken steps to prevent their economy from melting down."
"The impact on the Canadian currency should not prove to be terribly durable," he said.
Bonds Cut Gains, But End Stronger On Brazil
Canadian government bonds lost much of the day's gains but ended stronger on Wednesday on renewed safe-haven buying of fixed-income securities.
A financial market crisis in Brazil hit stock markets, prompting investors to seek shelter in U.S. treasuries and other quality bonds. As North American stocks bounced back from deep losses, traders took profits on bonds.
Brazil effectively devalued its currency by abandoning a tight band for the real, letting it to trade in a wider band. The country's central bank president resigned. The fear that Brazil would come under further attacks from currency speculators sustained a flight-to-quality bid.
Canada's benchmark 30-year bond due June 1, 2027 shed some of its gains of nearly C$2 and was up C$1.15 at C$139.44, yielding 5.297 percent.
The long yield slipped back, but was still far from lows around 5.17 percent in mid-December and intra-day record lows around 5.13 percent marked on October 5.
The U.S. 30-year bond, after gaining more than 2 points in early trade, was up 1-9/32 to yield 5.128 percent. The Canada-U.S. yield spread widened further to 17.1 basis points after widening to 15.0 at the previous close from 9.3 on Monday. The spread has been on a narrowing trend in recent weeks.
The shorter end of the yield curve also stayed firmer as concern over the negative impact of the Latin American economic downturn on North America has revived expectations of rate cuts by the U.S. central bank.
The Canadian yield curve steepened a bit. Canada's two-year bond trimmed gains, adding C$0.17 to C$100.53 to yield 4.699 percent. The two-year to 30-year yield spread narrowed to 59.7 basis points from 63.3 in early trade, but was still wider than 58.5 at the previous close.
The money market was moving in tandem with bonds, giving up some of earlier gains as equities cut some losses.
Canada's three-month when-issued T-bill yielded 4.61 percent, firmer than 4.65 percent at the previous close.
|
