Wednesday, June 11, 2014

Financial Comment - Oil set Canadian market on fire

Oil sets Canadian stock market on fire

The Canadian stock market is so far having a spectacular year, the S&P/TSX Composite Index is up by almost 9.5% year-to-date. The index currently is less than 200 points off its historic high reading posted almost exactly six years ago. To put this gap into perspective, given that this year the index has grown by approximately 1,300 points, the historic record may well be within reach.

What is behind this kind of strong performance? As we have noted on several occasions, the S&P/TSX Composite Index is now making up for a couple of unimpressive years when in 2012-2013 it grew by less than 14%, while the American S&P 500 over the same period jumped by 46%. This year, the Canadian index is getting fuel for its growth in particular from the energy sector. This has become more evident lately: crude oil prices have now exceeded $104 a barrel, their highest level in more than three months. As oil prices rose by more than 5% over the past month, the S&P/TSX Capped Energy Index’s performance was similar.

Can this strong performance of stocks continue into the months to come? On the one hand, there are signs of improving economies in China and Japan. In particular, Japan’s GDP grew by 1.6% in the first quarter of 2014 and by 6.7% in annual terms, while China’s exports rose 7% in May over May 2013. If these tendencies continue, it would raise global energy demand. Additionally, hurricane season is just getting started, and it often has an impact on U.S. offshore activity which reduces oil supply. On the other hand, the summer months ahead can often be volatile for the stock market. These trends will make watching energy stocks interesting over the next few months.

By: Ukrainian Credit Union Limited

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