The stock market recoiled Monday, as energy quotes surged again on concerns that Tropical Storm Rita may hit the already-ravaged Gulf Coast, as well as its energy production and refining facilities.
After pulling back last week, crude oil for October delivery soared $4.39, or 6.9%, to $67.39.
Energy prices had pulled back in recent weeks after several measures, including the International Energy Agency's release of crude oil reserves helped ease the "supply shock" created by Hurricane Katrina. And on Monday, the president of the Organization of Petroleum Exporting Countries said the group could provide all its spare capacity to the market.
Still, three weeks after Katrina brought devastation to several southeastern states, production and refining operations in the Gulf Coast still operate at a fraction of their normal capacity. Rita, which is also expected to reach hurricane strength, could cause further damage and delay the recovery.
Ahead of the
policy meeting Tuesday, concerns over Rita, crude's surge and the financing of escalating reconstruction costs kept buyers on the defensive.
Dow Jones Industrial Average
finished down 84.31 points, or 0.8%, to 10,557.63.
were the only Dow components in positive territory at the close.
lost 15.09 points, or 0.7%, to 2145.26. The
lost 6.89 points, or 0.56%, to 1231.02.
Don't Blame Canada
While inflation and reconstruction concerns sank U.S. stocks, those concerns have conversely helped Canadian equities. The Toronto Stock Exchange S&P/TSX index gained 0.4% to 11,039.14, after passing above the 11,000 mark for the first time in five years on Friday. The index is also fewer than 400 points from its all-time high.
It's not surprising that Canadian shares, which normally track U.S. stocks, have been on fire since Katrina, says BMO Nesbitt Burns economist Michael Gregory. The Canadian index is heavily composed of and influenced by gold and energy stocks, as well as other commodities producers such as copper and lumber.
All the elements are there for the perfect counter-storm for post-Katrina investors. While gains in energy shares in the U.S. couldn't offset broad market weakness, the Canadian index was lifted Monday by shares of
Canadian Natural Resources
And, of course, gold stocks continued to soar Monday -- including shares of.
Gold, which hit a 17-year high last week, should continue to benefit from inflation jitters. Traders are understandably concerned that stubbornly high energy prices eventually will seep down to core inflation, and that the government's reconstruction spending for the Gulf Coast could reach $200 billion. But after rallying more than 6% since Katrina hit, the yellow metal may be vulnerable to a short-term correction; gold fell $2.30 Monday in Nymex trading while gold stocks such as
( PDG) and
The bond market, meanwhile, found solace Monday from expectations that the Fed will deliver yet
another rate hike at Tuesday's meeting and signal its intention to continue fighting inflation.
The price of the benchmark 10-year Treasury bond finished up 7/32 while its yield was down to 4.25%. The gains were more pronounced in bonds with longer maturities, such as the 30-year bond, which was up 8/32 while its yield fell to 4.55%.
Even outside of gold, Canada's equities and economy should continue to benefit from soaring demand for commodities, says Gregory. Amid strained global capacity in energy production, Canada's natural gas production and the oil sands in the province of Alberta are attracting more and more attention from foreign investors, especially from China.
Canada produces many other commodities, such as copper and steel, which China needs. "One way to play China nowadays is to buy Canada," he says.
And the reconstruction efforts in the Gulf Coast will continue to fuel demand for basic materials, including lumber, another Canadian forte.
That's also the conclusion of Jeffrey Saut, market strategist at Raymond James. He believes that gains seen in U.S. equities in the two weeks after Katrina are poised to fizzle as the market will eventually "adjust for the inflationary impacted earnings environment." But Canadian equities, as well as the Canadian dollar, should continue to benefit from the current environment, and Saut remains "heavily invested" in both.
The only caveat, of course, is if U.S. economic growth, to which Canadian growth is particularly tied, eventually succumbs to soaring energy prices, as consumer confidence apparently did in August.
In Canada too investors will pay close attention to the assessment of the U.S. economy and the outlook for interest rates that the Fed will present at Tuesday's meeting.
To view Gregg Greenberg's video take on today's market, click here
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
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