Canada’s Commodity Rally at End as S&P/TSX Plummets

The market-leading rally in metals and energy stocks that pushed Canadian equities to the second-best in the world through much of this year is now a distant memory.
The benchmark Standard & Poor’s/TSX Composite Index has plummeted 7.7 percent from its all-time high on Sept. 3, approaching a 10 percent correction as prices for commodities from crude to copper and gold have plunged in the past three months amid slowing global growth and a rising U.S. dollar.
The S&P/TSX, which peaked at a 15 percent gain for the year in September, good for the second-best performer among developed markets in the world at the time, is now fourth.
“It’s downright ugly,” said John Kinsey, a fund manager at Caldwell Securities Ltd. in Toronto. His firm manages about C$1 billion ($893 million). “It’s the commodity stocks, but the main culprit is energy. It’s really being whacked here. People are thinking maybe they want to walk away from the oil patch.”
Energy and materials stocks, which led the advance in the S&P/TSX through the first half of the year, have all but erased those gains in the past three months. The two industries account for about 36 percent of the broader index.
The S&P/TSX Energy Index has pared its gain for the year to 1.6 percent while raw-materials stocks fell to a loss Oct. 7 and are now down 0.4 percent for the year.
Of the 69 members in the energy group, 63 have fallen in the second half of the year so far, led by a 48 percent plunge in Calgary-based oil explorer Lightstream Resources Ltd. (LTS)

‘Sea Change’

Crude in New York retreated 1.8 percent to settle at $85.77 a barrel yesterday, closing 20 percent below its June high to enter a bear market a day after Brent oil did the same. U.S. shale oil is set to boost U.S. crude output to the most in more than three decades, reducing demand for Canadian oil.
“You’ve got a sea change there with the U.S., and if China isn’t picking up the slack that’s creating a lot of supply that wasn’t there before,” Kinsey said.
Economic growth in China, the world’s largest commodities consumer and Canada’s second-largest trading partner after the U.S., is forecast to slow to 7 percent and 6.9 percent in 2015 and 2016, the lowest since 1990, according to the average estimate of a survey of economists by Bloomberg.
Teck Resources Ltd. (TCK/B), Canada’s largest diversified miner, has slumped 26 percent since the end of June, as iron ore prices plunged in September on new supply and tepid demand from China. Nickel fell into a bear market in London on Sept. 29.
“These things happen to commodities, they go in cycles,” Kinsey said. “It’s starting to look like it might be something that could go on for a while.”

Gold Overdone

The S&P/TSX may have already suffered the “brunt” of its losses, especially among gold producers, Youssef Zohny, a portfolio manager at Stenner Investment Partners of Richardson GMP, said. The impending end of the U.S. Federal Reserve’s monthly bond purchases this month had boosted the U.S. dollar at the expense of gold, seen as a haven investment. That trade may reverse itself as volatility returns to equity markets.
“That’s put a lot of pressure on the gold space,” Zohny said in a phone interview from Vancouver. Richardson GMP manages about C$29.3 billion. “If there is a safe haven bid and a flight out of equities, it might contribute to a rally.”
The S&P/TSX Gold Index has slumped 23 percent from a March 14 peak as gold prices tumbled 11 percent in that time, led by a 45 percent slump in Yamana Gold Inc.
To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net
To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jacqueline Thorpe, David Scanlan