The Toronto stock market was modestly higher Friday after two days of big losses sparked by indications that the U.S. Federal Reserve is likely to start winding up a key element of its economic stimulus.
The S&P/TSX composite index oscillated between negative and positive ground during the session. At mid-afternoon, the index was up 40.28 points to 12,008.85 after the U.S. central bank said it could wind down its bond-buying program by the middle of next year, which traders took to mean that higher interest rates are on the way.
The Canadian dollar also added to recent losses, plunging 0.8 of a cent to 95.6 cents US — its lowest since late November 2011 — amid a higher U.S. currency and data showing a disappointing read on retail sales and tame inflation.
U.S. indexes were in a holding pattern after also having racked up sharp losses, with the Dow Jones industrials up 9.29 points to 14,767.61, the Nasdaq down 17.57 points to 3,347.07 and the S&P 500 index up 1.32 points at 1,589.51.
"Maybe we're flatlining this for awhile because there's nothing here to indicate that we're all of a sudden going to run away," said Fred Ketchen, manager of equity trading at Scotia Capital.
"One thing about it: interest rates aren't going down and it would be logical for me to say that interest rates are going up but I don't know when."
Investors have got used to central banks flooding the financial markets with stimulus since the 2008 financial collapse and subsequent recession.
The Fed's purchase of US$85 billion a month in bonds has kept long-term interest rates low and also helped fuel a strong rally on most stock markets. The exception has been the resource-weighted TSX, where mining stocks in particular have lost ground amid a sluggish global recovery.
Nonetheless, the Fed appears to think that economic data is nearly strong enough to allow it to let up on its bond buying program.
Markets have anticipated for weeks now that the Fed would cut back on its bond purchases, which had the effect of boosting the American dollar and bond yields.
The yield on the U.S. benchmark 10-year bond hovered around 2.5 per cent Friday afternoon, up from about 2.25 per cent before Bernanke made his announcement Wednesday afternoon. The yield had been as low as 1.6 per cent in early May.
The prospect that the policy will be unwound sooner than many investors thought prompted big moves late Wednesday and Thursday, with the Dow shedding well over 500 points. However, the blue chip index is still up about 12.5 per cent year to date.
The TSX fell about 400 points in the previous two sessions, leaving the main Canadian index down 3.75 per cent so far this year.
Higher bond yields have also punished stocks in sectors such as utilities, pipelines, REITs and telcos and it was these sectors which provided some lift to the TSX on Friday.
The TSX telecom sector gained 1.5 two per cent with Telus ahead 33 cents to $33.89 and Rogers Communications climbing $1.18 to $45.96.
The utilities component improved almost one per cent and Atlantic Power ran up 30 cents to $4.46.
Gold stocks were also on the mend somewhat. The gold sector gained 1.15 per cent as August gold climbed $5.80 to US$1,292 an ounce on the New York Mercantile Exchange after tumbling $88 to a 2 1/2 year low. Goldcorp improved by 37 cents to C$25.18.
Oil and base metal stocks largely weakened Friday while commodity futures were mixed after sustaining a severe mauling. Prices fell heavily Thursday, partly because of demand concerns that arose from a weak Chinese manufacturing report but also because of the higher U.S. dollar.
A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals, which are dollar-denominated.
The base metals component was up a slight 0.12 per cent as July copper edged up three cents to US$3.10 a pound following an eight-cent drop Thursday. First Quantum Minerals was ahead 14 cents to C$15.62.
The July crude contract was down $1.38 to US$93.76 a barrel after giving up almost $3 on Thursday. The energy group was off 0.03 per cent. Canadian Natural Resources shed 31 cents to C$29.29.
Elsewhere, shares in Wi-LAN Inc. jumped 41 cents or 9.65 per cent to $4.66 after it said Thursday after the close that it has renewed its licensing agreement with Samsung Electronics Co., Ltd. Under the agreement, Wi-LAN grants Samsung a licence to its patents for wireless products such as handsets, tablets and laptops, and for networking infrastructure equipment.
In economic news, Statistics Canada said that the annual inflation rate rose to 0.7 per cent in May while core inflation was stable at 1.1 per cent, both below expectations.
Canadian retail sales edged up 0.1 per cent to $39.5 billion in April, less than the 0.2 per cent that had been expected, following flat sales in March. Statistics Canada said that stronger sales at motor vehicle and parts dealers were offset by weaker sales at gasoline stations.