Canada's big six report this week with valuations leaving no margin for error, strategists warn
Canada's main stock index closed higher on Monday even as fresh US tariffs took effect, in a session that advisors may read as a case study in the TSX's commodity-heavy construction.
According to Reuters, the S&P/TSX composite index rose 0.26 percent, gaining 93.89 points to 36,714.12.
The materials sector advanced 1.4 percent as bullion hit a three-month high against a subdued US dollar with I-80 Gold Corp, Seabridge Gold, and NovaGold Resources climbing between 6.8 percent and 10.5 percent.
The December gold contract rose US$17.20 to US$4,697.80 an ounce.
"The performance today says it all about trade and what trade means to the TSX," Philip Petursson, chief investment strategist at IG Wealth Management, told Reuters.
He said the index responds to global economic and commodity conditions rather than tariffs, and called that one of its benefits.
Dispersion beneath the index level was wide.
Bombardier fell 5.9 percent, Magna International 6.6 percent, and Linamar Corp 8.3 percent, per Reuters.
Energy was the heaviest drag at down 0.9 percent as investors took profits ahead of expected new US sanctions on Iran.
The October crude oil contract dropped US$2.05 to US$85.01 per barrel, The Canadian Press reported.
Adam Ludwick, director of asset allocation at NEI Investments, said the split was largely confined to directly exposed names.
"Autos across the board are down quite a bit, both Canada and the US, but gold is up," he told The Canadian Press, adding that Canadian industrials are struggling.
Companies without direct tariff exposure are mostly avoiding the same drawdown and risk-off sentiment, he said.
He also said Canadian equities now turn less on individual earnings potential than on how businesses forecast the next year or two.
The financials index rose 0.2 percent into third-quarter results from Canada's big six banks, with Bank of Montreal and Bank of Nova Scotia reporting Tuesday, according to Reuters.
Bank stocks are trading at historically high valuations and have outperformed the TSX year to date, Reuters reported analysts as saying.
Petursson said the banks have "really no margin for error." Strong earnings may not move the market, he said, though any disappointment will be.
Ludwick raised the same point on valuation, saying Canadian banks trade at a higher multiple than US banks on a relative basis and will have to justify that premium.
Currency positioning offers a second read for portfolios.
The loonie traded at 72.24 cents US against 72.67 cents US on Friday, The Canadian Press reported, after falling as much as 0.6 percent to $1.3844, its worst session since June 17 and the weakest showing among G10 currencies, according to Bloomberg.
MUFG forecasts $1.41 per US dollar in the third quarter, and Derek Halpenny, the bank's head of research for global markets EMEA, said "downside risks will intensify the longer there is no resolution to this escalating trade war."
CFTC data cited by Bloomberg shows hedge funds have trimmed bearish loonie bets over the past month after those positions hit a two-year high in late July, leaving room to rebuild them.
Swaps markets are pricing roughly 70 basis points of Bank of Canada hikes through June, Bloomberg reported, and Elias Haddad, global head of markets strategy at Brown Brothers Harriman, said a pullback in those expectations would pressure the currency near term, while softening US rate expectations "should limit USD/CAD overshoots beyond 1.4000."
Sébastien Mc Mahon, chief economist at iA Financial Group, said in a statement that the loonie ranks among the most shorted major currencies, "leaving much less room for further downside," and that Monday's reaction signalled investors were not overly optimistic on a US-Canada deal.
Washington imposed 50 percent tariffs on roughly US$20bn of Canadian goods on Saturday after talks collapsed, covering dairy, wine, wood products, furniture, cement, and ceramics, CNBC reported.
Prime Minister Mark Carney has pledged dollar-for-dollar retaliation from September 8.
US President Donald Trump said Monday that tariffs on all cars, trucks, auto parts, and steel will rise to 50 percent on January 1, 2027, per Reuters.
The macro tail risk sits in escalation rather than in the current package.
Bradley Saunders, North America economist at Capital Economics, told CNBC that Canada's most exposed industries "could be crippled" by the levies.
He estimated that extending a 50 percent rate to a fifth of Canadian goods exports to the US, up from 5 percent now, could cut around 2 percent from GDP and push the country into recession.
Canadian economist Trevor Tombe has estimated sustained 50 percent tariffs could cost roughly 90,000 jobs, CNBC reported.
The Dow Jones Industrial Average added 140.15 points to 53,417.16, the S&P 500 fell 21.51 points to 7,652.86, and the Nasdaq composite dropped 200.26 points to 25,980.19, according to AP.
Nvidia sank 2.9 percent and was the heaviest weight on the S&P 500 before Wednesday's earnings report, which AP noted could set the direction for AI-related equities.
US Federal Reserve chair Kevin Warsh speaks Friday at Jackson Hole.
