Recap: Week Ending March 25, 2016
A hawkish tone from the Federal Reserve, as well as a fall in the price of crude oil, sent equities in North America and around the world lower last week. Despite experiencing a five-week string of week over week gains, the Dow Jones was unable to trade higher last week, falling by 0.49%. With this being said, the move lower was with little volatility as trading volume was relatively light. One of the causes for relatively light volumes was that of the Easter holiday closure on Friday which saw all markets not open for business. Regardless of the holiday, daily trading ranges have begun to narrow from the wide range trade experienced early in the year. The fact that ranges are shrinking is a sign that that market is more comfortable at the levels which it is currently trading at. With regards to action last week, the US economic calendar was fairly light with the exception of Monday when the Federal Reserve Presidents of Atlanta and San Francisco both stated that the rising growth and signs of inflation may result in an interest rate hike within the next two Fed meetings. This view was taken rather hawkishly and sent equities falling slightly. One of the major causes believed to be behind the selling seen at the beginning of the year was the notion that many were financing the purchase of equities with cheap borrowed money. As rates rose late last year the opportunity of purchasing such stocks using lower rates started to diminish, resulting in less support for a previously well-supported market. Many believe that further hikes may result in an even further reduction in buyers from the market as less and less will be able to purchase equities with higher rates. The hawkish tone from the Fed sent bonds lower as well with the yield on the ten-year US Treasury Note trading higher by 1.60% to settle Friday at 1.91%. As yields and bond prices move in inverse directions, the price of the 10 Year Note fell by 0.41% last week to settle at 129.01. As money was flowing out of bonds, it was flowing into the US Dollar as the US Dollar Index moved higher last week for the first time in three weeks. The US Dollar Index is an index which represents a basket of currencies which trades against the US Dollar. The move higher in the US Dollar last week was a reflection of investors heading to the US Dollar to experience the reward of higher interest rates. Usually, the US Dollar has an inverse relationship with that of assets priced in it. Taking this into consideration, the price of WTI crude fell last week, ending a five-week winning streak. The move lower in crude can also be attributed to the selling pressure in equities as a strong relationship has formed between the price of crude and stocks in Canada and the United States. Last week WTI settled down $1.54 or 3.74% to settle at $39.59.
The selling in crude without a doubt caused further selling in the Toronto Stock Exchange Composite Index, or TSX, as it continued its two-week decline. Last week the Canadian equity benchmark index settled the week lower by 139 points or 1.03% to close once again below its 200-week as well as 200-day simple moving average. As mentioned in weeks past, the 200-day/week moving average is a technical indicator which many in the industry consider to be resistance to any push higher. The notion that the TSX is unable to break this barrier furthers the fact that the Canadian market is much weaker than its American peers such as the Dow, which is trading well above its 200-day moving average. It will be important to see if the TSX can build up enough buyers to push it above this level of resistance or if it will sit at these levels waiting for the next news event.