Bank of Canada Rate Cut and Impact on Stock Indices

At the close of trading on Wednesday, the major U.S. stock indices faced declines. The Dow Jones (US30) Index dropped by 0.96%, the S&P 500 Index (US500) decreased by 0.92%, and the NASDAQ Technology Index (US100) closed down by 1.55%. This overall downturn was influenced by rising Treasury yields and mounting concerns surrounding the upcoming U.S. elections. Investors and hedge funds are taking steps to lock in profits amidst these uncertainties.

The downward trend in stock prices was exacerbated by negative news from several key corporations. For instance, shares of McDonald’s (MCD) fell by 5% following reports linking an E. coli outbreak to their Quarter Pounder sandwiches, which reportedly sickened dozens of individuals across multiple states. In addition, Boeing (BA) saw its shares decline by 1.7% after announcing larger-than-expected losses in adjusted free cash flow for the third quarter. Also, Coca-Cola (KO) reported an unexpected 1% drop in third-quarter sales, leading to a 2% decrease in its share price.

In Canada, the value of the Canadian dollar weakened to 1.38 CAD per dollar, marking its lowest level since August. This decline followed the Bank of Canada’s decision to cut interest rates by 50 basis points (bps), indicating a likely continuation of reductions in its benchmark rates. This cut represents the first significant move in the current easing cycle after three consecutive rate cuts of 25 bps. The Bank noted that recent economic data reflects slowing inflation and a softening labor market. Additionally, the Canadian dollar is facing pressure from falling oil prices, which are adversely affecting the country's export revenues.

Equity markets in Europe also mirrored the negative sentiment seen in the U.S. markets on Wednesday. The German DAX (DE40) experienced a minor decline of 0.23%, while France’s CAC 40 (FR40) fell by 0.50%. Conversely, Spain’s IBEX 35 (ES35) recorded a slight gain of 0.27%, and the UK's FTSE 100 (UK100) closed down by 0.58%.

Prices of WTI crude oil fell below $71 per barrel as of Wednesday, ending a two-day rally. This decline followed the latest data from the Energy Information Administration (EIA), which indicated that U.S. oil inventories remain elevated, reporting an increase of 5.5 million barrels—significantly higher than anticipated.

In Asia, market trends displayed a mix of responses. The Nikkei 225 (JP225) in Japan fell by 0.80%, while China’s FTSE China A50 (CHA50) rose by 0.37%. The Hang Seng Index in Hong Kong gained 1.27%, and Australia’s ASX 200 (AU200) finished up by 0.13% from the previous day. Chinese markets have benefitted from speculation about a proposed 2 trillion yuan market stabilization fund, as suggested by a think tank affiliated with the government. Additionally, China’s central bank intends to enlarge the size of its new swap fund to enhance market liquidity after an initial quota of 500 billion yuan was allocated.

The Australian Manufacturing PMI Index revealed a downturn, dropping to 46.6 in October 2024, down from 46.7 in the previous month. This signifies the fastest rate of decline in the sector since May 2020, marking nine consecutive months of deterioration. Conversely, the services PMI business activity index increased slightly to 50.6 in October from 50.5 in September, indicating a continuation of growth for the ninth straight month. In terms of monetary policy, Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser expressed that recent strong employment growth was somewhat surprising, hinting that the central bank may adjust its policies based on future economic data. Market expectations suggest that the RBA will maintain steady policies throughout the year, with the prospect of its first rate cut not anticipated until May of the following year.

The New Zealand dollar experienced pressure, trading close to a two-month low, attributable to a strengthening U.S. dollar fueled by rising expectations that the Federal Reserve will continue to moderate interest rate cuts in the near future. The strengthening dollar is also seen as favorable for Donald Trump’s chances in the 2024 presidential election. Domestically, the Kiwi is further burdened by expectations that the Reserve Bank of New Zealand will announce another 50 bps rate cut at its upcoming meeting in November, with a slight risk priced in for a possible 75 bps cut.

Upcoming economic indicators include the Manufacturing and Services PMI figures from Australia, Japan, Germany, the Eurozone, and the UK, as well as key U.S. statistics on jobless claims, manufacturing PMI, services PMI, and new home sales, all worth monitoring.

Bank, Canada, Stocks