TSX in for further losses, falling crude oil sparks energy sector sell-off

The Toronto stock market is expected to be under more pressure this week after a late fall rally was stopped in its tracks by plunging oil prices and a major sell-off in the energy sector.

The TSX fell 366 points or 2.43 per cent last week after six straight weeks of gains, led by a 12 per cent slide in the energy sector as oil prices fell to a five year low just above the US$66 mark.

The tumble came after the OPEC oil cartel decided to ignore calls for a cut in production in order to find a floor for prices that have plunged around 35 per cent since mid-summer because of lower demand and a glut of supply, due in large measure to greatly increased production in the U.S. Midwest.

It is this rising tide of crude that Saudi Arabia, OPEC’s biggest exporter and one of its lowest-cost producers had in mind when it firmly turned aside calls for a production cut.

“OPEC is prepared to do battle over market share — they’re not prepared to be the ones to give up and then have someone else fill in the vacuum,” observed Colin Cieszynski, chief market strategist for CMC Markets.

“And on that basis, I don’t think anyone wants to be the first to cut production,” Cieszynski said.

Even though crude prices have come down, “I don’t think you’re looking at a V bottom here,” he said. “They’ve come down and going to stay down for a while and that has a whole bunch of implications.”

The most obvious spillover effect will be on marginal oilsands producers who find it unprofitable to produce if crude stays below US$70 a barrel. Other companies will find it’s necessary to dramatically cut capital spending.

The fall in oil prices is mirrored in big declines in the price of gold. That’s because many investors buy bullion as a hedge against inflation and lower energy prices will drive inflation lower.

There has also been a positive effect — lower oil prices ease heating costs for some people and also drive gasoline prices lower, something that makes people feel a bit more flush and willing to spend.

That has helped make consumer stables the major performer on the TSX, up a staggering 35 per cent year to date, while the consumer discretionary sector has jumped about 25 per cent. Together, the two groups comprise everything from grocery chains like Metro (TSX:MRU) to retailers such as Canadian Tire (TSX:CTC.A).

Falling prices for oil and metals have also sent the Canadian dollar reeling, losing about 1.6 cents last week in a move that will be welcomed by Canadian exporters moving their products to the U.S.

Meanwhile, the earnings season draws to a close next week when the big Canadian banks post quarterly and full fiscal year earnings reports.

“I’m a little concerned about the bank earnings,” Cieszynski said. “I think we will see more moving pieces this time around.”

For one thing, the big drop in the Canadian dollar could impact earnings.

“For the banks, the ones that have international operations, the bigger ones, it actually could be a positive, depending on what they owe and who owes them,” explained Cieszynski. “(But) if they have to pay out stuff in U.S. dollars, then that causes more Canadian dollars to do that.”

The capital markets divisions of banks could also have come under pressure during a short, intense sell-off on North American stock markets in early October.

And Cieszynski said lower oil could also impact earnings, if not in this quarter then the next.

“Going forward, people will look at what does the drop in the oil price mean for their lending to the oilpatch,” he noted.

On the economic front, the major Canadian event occurs Wednesday when the Bank of Canada makes its next announcement on interest rates. The central bank is universally expected to leave its key rate unchanged at one per cent, where it’s been for more than four years.

The week ends with November job creation numbers from both Canada and the United States.

The U.S. Labor Department is expected to say American monthly job creation continues to top 200,000. Economists reckon that about 225,000 jobs were created last month.

Economists forecast that Statistics Canada will announce that the economy cranked out 5,000 jobs, adding to the 43,000 created in October.