Markets mixed as U.S. rate unchanged

The Toronto stock market closed in the red Wednesday while New York markets turned higher after the U.S. Federal Reserve announced it was keeping its benchmark rate unchanged. The S&P/TSX composite index closed down 20.07 points at 14,732.98, while the loonie was up 0.51 (U.S.) at 81.73 cents.

On commodity markets, the July crude contract gave back five cents to $59.92 a barrel, while the August gold contract fell $4.10 to $1,176.80 an ounce.

American markets, down earlier, rebounded to modest gains after the Fed said — following its two-day policy meeting — that although the U.S. economy has strengthened in recent months, it wants to see further gains in the job market and higher inflation before hiking interest rates from record lows.

The Dow Jones industrial average closed up 31.26 points at 17,935.74, while the Nasdaq added 9.33 points to 5,064.88 and the S&P 500 was 4.15 points higher at 2,100.44

While the Fed gave no timetable for a rate hike, all but two of its 17 policymakers think the Fed will raise its key short-term rate this year. That rate has been held near zero since 2008 and has helped fuel markets ever since the Great Recession.

Craig Jerusalim, portfolio manager, CIBC Asset Management, said that while it was no surprise the Fed didn’t raise rates on Wednesday, in a general sense, “they should have.

“Quite frankly, the U.S. is no longer in a crisis interest-rate-level environment.”

Many analysts say that if the economy keeps improving, the Fed will likely raise its key short-term rate in September.

Jerusalim said the important thing is to be aware that a rate increase is coming.

“Obviously everything is data-dependent and things can change, but I think that the fundamentals suggest that zero interest . . . is no longer needed and therefore they’ll be looking for any opportunity to get off of those emergency levels.”

Although the TSX failed to take heart from the latest Fed news, Jerusalim said that was largely to do with the makeup of the Canadian market. The heavily weighted financial sector was the second-worst decliner, down 0.58 per cent.

Meanwhile, he doesn’t buy the argument that equities have become too expensive.

“I would argue that valuations are unlikely to correct given (the) stimulus from low interest rates, low commodity prices and that wide disparity between earnings yield and bond yield.

“Right now the10-year government of Canada yield is less than 2 per cent while the TSX dividend yield is about three per cent and the earnings yield is about 6 per cent. There’s a big difference there and for those three reasons I think that valuations will remain above average.”