Canada Stocks Surge as Bond Yields, Loonie Plunge on Rate Cut

Canadian stocks surged, government bond yields slumped to a record and the dollar slid to the weakest in more than five years after the nation’s central bank unexpectedly slashed interest rates amid the collapse in crude.

The benchmark Standard & Poor’s/TSX Composite Index soared

1.8 percent, led by the biggest rally in financial services stocks in three months. The Canadian dollar, nicknamed the loonie because of the waterfowl on its C$1 coin, dropped 1.8 percent to the lowest since April 2009 versus the greenback. The yield on Canada’s benchmark 10-year government bond fell to as low as 1.365 percent.

“Every economist I’ve seen or read or heard from today wasn’t expecting this, so I’d say the market was completely caught off-guard,” said Gareth Watson, vice-president of investment management and research at Richardson GMP Ltd. in Toronto. His firm manages about C$28 billion ($22.7 billion). “You’re getting a boost here on the Canadian side to anything that’s interest-sensitive. And people are bailing out of the currency altogether. That’s a function of the lack of expectations of this happening today.”

Stephen Poloz, governor of the Bank of Canada, cut the rate on overnight loans between commercial banks to 0.75 percent from 1 percent, a decision none of the 22 economists in a Bloomberg News survey predicted. The rate had been unchanged since September 2010.

Canada, the largest exporter of oil to the U.S., is loosening monetary policy as a plunge in crude prices raises the risk of deflation globally. Oil has dropped more than 10 percent this year following a decline of almost 50 percent last year, the most since the 2008 financial crisis. The U.S. pumped crude at the fastest rate in more than three decades and the Organization of Petroleum Exporting Countries resisted calls to reduce supply.

‘Big shock’

“It’s a big shock,” David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto. “They’re going to try to provide the necessary medicine here for the soft landing from slowing debt growth, from slowing investment in the oil sands, and I think they thought it needed some stimulus here.”

Canada, the Group of Seven’s biggest crude exporter, is already feeling the effects of oil dropping below $50 a barrel, as companies such as Calgary-based Suncor Energy Inc. reduce staffing and investment. Canada’s oil sands are among the most expensive reserves to develop.

The central bank lowered its 2015 forecast for economic growth in Canada to 2.1 percent from 2.4 percent previously, and forecast it will average about 1.5 percent in the first half of the year. The International Monetary Fund early this week made the steepest cut to its global-growth outlook in three years.

The Bank of Canada’s move comes amid efforts by central banks around the world to stimulate the global economy. The European Central Bank is expected to announce Thursday it will buy as much as 1.1 trillion euros ($1.3 trillion) of debt through December 2016 in a push to fend off deflation. The Bank of Japan has already boosted its asset purchases and the Bank of England said two policy makers had dropped their call for rate increases.

Wide Open

“We expected the Bank of Canada to open the door a crack to a potential cut, but Governor Poloz decided to swing it wide open,” said Peter Buchanan, economist with CIBC World Markets Inc., in a report today. “Today’s outright target reduction comes as a surprise.”

Eight of 10 major groups in the S&P/TSX advanced on Wednesday, with energy and health-care shares leading the gains. A measure of volatility of S&P/TSX 60 options sank 12 percent to

18.74, the biggest drop in almost five weeks.

Royal Bank of Canada, the nation’s second-largest lender by assets, jumped 1.6 percent, the most since October, while Dream Unlimited Corp., a commercial and residential real estate developer, rallied 5.1 percent. The S&P/TSX Financials Index, which accounts for about a third of the broader S&P/TSX, climbed

1.5 percent.

Energy producers increased 3.2 percent as a group. Crude futures rose 2.8 percent to settle at $47.78 a barrel in New York, retracing some of yesterday’s 4.7 percent slide. Baytex Energy Corp. and Enerplus Corp. jumped at least 5.4 percent.

Dollar Volatility

The 14-day average true range of the loonie, a volatility gauge that takes into account the differences between intraday highs and lows, rose to 0.013 today, the highest since November

2011.

Goldman Sachs Group Inc. said it’s reviewing the forecast for the Canadian currency following the surprise rate decision. The New-York based bank lowered its six-month projection to C$1.20 from C$1.14 at the beginning of January.

“The big picture is that this represents a structural break for the BOC, with policy diverging from our expectations for the Fed,” Robin Brooks, a chief currency strategist at Goldman, said in a research note. “This structural break is important and sets the stage for USD/CAD moving materially higher,” he said, referring to the value of the U.S. currency.

There’s a 68 percent chance the Federal Reserve will raise its benchmark rate for the first time since 2006 by December, according to futures trading.

The yield on Canada’s benchmark 10-year bond dropped to as low as 1.365 percent before trading at 1.43 percent, about 0.4 percentage point below the U.S. 10-year note yield. It’s the biggest difference since 2007.

Yields on Canadian two-year securities touched 0.536 percent, and 30-year bond yields reached 2 percent.

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