Canadian markets are expected to be under pressure this week after the TSX rally coming to a halt after slumping oil prices and a major sell-off in the energy sector.
The TSK fell by 2.43 percent last week after six consecutive weeks of gains. The energy sector dropped by 12 percent, as oil prices fell below the $70 level, down to $66 – a five year low.
Oil prices took a real hit after the OPEC’s decision not to reduce oil production amid the oversupply in the market.
The reason why OPEC decided not to cut production was to have a market edge over North American oil companies. Saudi Arabia, the largest oil exporter belonging to OPEC, is one of the lowest-cost producers in the world.
Colin Cieszynski, chief market strategist for CMC Markets, told CTV News:
“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. And on that basis, I don’t think anyone wants to be the first to cut production,”
The implications of oil prices staying low is that oil producers will find it difficult to make a profit and have to make big cuts in capital spending to stay afloat.
Not only have oil prices plunged, but there have also been big declines in the price of gold. Typically investors buy gold to hedge against inflation, however, as fuel costs drop inflation will drop and the demand for the precious metal will subsequently drop too.
Consumers will benefit from the drop in fuel prices, allowing them to spend more on other things. The drop will also benefit airlines – as it will significantly reduce operating costs.
As oil prices continue to fall the Canadian dollar has lost some ground. Last week the Loonie lost nearly 1.6 cents, but this is also something that Canadian exporters will likely welcome.
The earnings season for banks is approaching.
However, Cieszynski commented:
“I’m a little concerned about the bank earnings. I think we will see more moving pieces this time around.”
The drop in the Canadian dollar could have a negative impact on 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,” said Cieszynski. “(But) if they have to pay out stuff in U.S. dollars, then that causes more Canadian dollars to do that.”
This week the Bank of Canada will be announcing its plans on interest rates.
