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Fed chair renomination boosts bond yields but hurts technologies and TSX

·4 min read

TORONTO — The renomination of the U.S. Federal Reserve chairman prompted bond yields to rise, which helped the financials sector but hampered technology as Canada's main stock index suffered its worst day in a month.

U.S. President Joe Biden selected Jerome Powell for a second term but delays in announcing the decision had some observers expecting a switch to a move dovish candidate, Lael Brainard.

"I think the markets were relieved this morning when they got the news," said Mona Mahajan, senior investment strategist at Edward Jones.

She said the selection of Powell, who was first appointed by former president Donald Trump, makes sense since it creates continuity. Powell was at the helm during the COVID-19 crisis and will now oversee the process of bond tapering and rate hikes as the economy emerges from the pandemic.

Brainard was appointed vice-chair with several more seats to be filled on the Fed's board of governors.

"Certainly if we had gotten the surprise of Brainard, we could have gotten some volatility given the uncertainty around what she might do for policy (rate hikes) so that was first and foremost," Mahajan said in an interview.

With Powell at the helm, the plan remains intact for bond tapering to continue with the central bank assessing the need for higher interest rates in the second half of the year.

The U.S. dollar strengthened in response and the 10-year U.S. bond yield increased to 1.627 per cent while the Canadian 10-year rose to 1.761 per cent.

The Canadian dollar traded for 78.86 cents US, its lowest level in two months and compared with 79.12 cents US on Friday.

The leaders on the S&P/TSX composite index were energy and financials but their gains were more than offset as nine of the 11 major sectors fell, led by by technology and heath care.

The Toronto index closed down 134.26 points to 21,420.77 for its worst day since Oct. 29.

In New York, the Dow Jones industrial average was up 17.27 points at 35,619.25. The S&P 500 index was down 15.02 points at 4,682.94, while the Nasdaq composite was down 202.68 points at 15,854.76 after both set intraday record highs.

Traditional so-called value sectors, especially financials, do well when yields are rising and the yield curve (the difference between short and long-term bond yields) is steepening.

The Toronto-Dominion Bank and the Canadian Imperial Bank of Commerce gained 1.2 and one per cent, respectively.

Energy gained 0.85 per cent in a partial recovery from last week's weakness. Shares of Crescent Point Energy Corp. increased four per cent while Enerplus Corp. was 2.9 per cent higher.

The January crude oil contract was up 81 cents at US$76.75 per barrel and the January natural gas contract was down 28.4 cents at US$4.86 per mmBTU.

Crude oil prices fell last week on reports that the U.S. and other countries were looking at tapping into the strategic petroleum reserves in a bid to lower prices at the pumps.

"We're just seeing a bit of relief coming out of the sector today," said Mahajan.

Technology was the biggest laggard, losing three per cent with Hut 8 Mining Corp. down 5.6 per cent and Shopify Inc. off 5.2 per cent.

Technology stocks typically do worse in higher-rate environments because future profits are less attractive to investors.

Materials lost some ground as gold prices fell 2.3 per cent. It's partially in a negative response to rising bond yields and some profit-taking following a run last week because of higher inflation.

The December gold contract was down US$45.30 at US$1,806.30 an ounce and the December copper contract was down 1.1 cents at nearly US$4.40 a pound.

This report by The Canadian Press was first published Nov. 22, 2021.


Ross Marowits, The Canadian Press

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