TSX closes down on euro crisis

May 19, 2010

Malcolm Morrison

The Toronto stock market fell back Wednesday as German moves to support the euro by cracking down on speculators failed to reassure investors that the European Union can contain a government debt crisis.

The German move rattled markets in part because it decided to go it alone.

It also suggested that policy-makers might be grasping at straws to stem flagging confidence about the ability of European governments to pay off their heavy debt amid slow growth.

The S&P/TSX composite index closed down 98.74 points at 11,665.77 after Germany’s regulator announced it was banning so-called naked short selling of eurozone government bonds, as well as shares in 10 key German financial institutions until March 31, 2011.

In a typical short sale, a trader sells borrowed shares in hopes of buying them cheaper later and profiting on the difference. A ``naked” short is when traders sell shares without borrowing them first. The euro initially responded badly to the German move, dropping to a four-year low of US$1.2143 before recovering to trade at $1.2371.

There were also big swings in other currencies and commodities as investors digested the action by the eurozone’s biggest economy.

The Canadian dollar was down 0.66 of a cent at 95.77 cents US after earlier falling as much as 1.54 cents US.

The TSX Venture Exchange moved 54.37 points lower to 1,486.09.

The June crude contract on the New York Mercantile Exchange finished up 46 cents at US$69.87 a barrel after earlier falling to $67.90. Oil has plunged more than 20 per cent since climbing to an 18-month high of US$87.15 a barrel on May 3 on demand concerns and the rising greenback.

However, most of the trading already has moved away from the June contract, which is set to expire Thursday. The July contract fell 22 cents to US$72.48 a barrel.

Investors also took advantage of the markup between the June and July oil contracts. The spread between the two contracts means investors can make money by simply storing their June oil and selling it a month later.

As a result, supplies at the benchmark delivery point in Cushing, Okla., have bulged to an all-time high. That forces prices even lower.

The TSX energy sector slipped 0.23 per cent as Canadian Natural Resources lost 59 cents to C$34.80.

TSX gold stocks were the biggest percentage decliners as the June bullion contract on the Nymex was down $21.50 at US$1,193.10 an ounce. Gold had run up to an intraday record high of just under US$1,250 on Friday. Barrick Gold Corp. (TSX:ABX) faded $1.64 to C$44.46 while Kinross Gold Corp. (TSX:K) lost 77 cents to C$18.05.

The July copper contract in New York was also off early lows, down seven cents at US$2.96 a pound. The base metals sector was down 2.43 per cent as Teck Resources (TSX:TCK.B) dropped 85 cents to C$32.68 and First Quantum (TSX:FM) was off $2.91 at C$62.74.

Outside commodities, the industrial sector was the biggest decliner as Canadian Pacific Railway (TSX:CP) shed 91 cents to $56.69.

The financial sector was the biggest advancer, up 0.2 per cent as CIBC (TSX:CM) gained $1.95 to $74.25.

Adding to market instability Wednesday was a concern that an aid package worth US$1 trillion to help European governments deal with unsustainably high debt is insufficient and that the huge spending cuts needed to get that aid will drag down growth across the continent.

“And that’s the underlying worry — that Greece is only part of the issue,” said John Stephenson, portfolio manager at First Asset Funds Inc.

“People think all the dithering out of Germany in particular is really weakening the supposed resolve of this whole package and so there’s just concern it’s going to spread and they’re going to be stuck in piecemeal, last-minute bailouts of these countries and things will slowly spiral down.”

Major European stock markets tumbled nearly three three per cent.

The TSX has tumbled 530 points or 4.34 per cent over five straight losing sessions, leaving the market about 80 points below where it started 2010 trading.

New York markets were also off earlier lows as the Federal Reserve upped its estimate for economic growth. The central bank said Wednesday that the U.S. economy will grow between 3.2 per cent and 3.7 per cent this year. That’s an upward revision from a growth range of 2.8 to 3.5 per cent in its January forecast.

The Dow Jones industrial average was down 66.58 points at 10,444.37.

The Nasdaq composite index lost 18.89 points to 2,298.37 while the S&P 500 index shed 5.75 points to 1,115.05.

In economic news, Statistics Canada reported that wholesale sales increased for the fourth time in five months in March, rising 1.4 per cent to $44.4 billion.

U.S. consumer prices declined in April for the first time in 13 months while core inflation rose over the past year at the slowest pace in 44 years. The U.S. Labour Department reported that consumer prices edged down 0.1 per cent last month, reflecting a big fall in energy prices. Core inflation, which excludes volatile food and energy, was flat in April.

In earnings news, Canaccord Financial Inc. (TSX:CF) reported a profit of $7.5 million for its fourth quarter and an annual profit of $38.5 million. It was a big improvement on comparable periods a year earlier, when Canaccord’s fourth-quarter net income was just $3.6 million and fiscal 2009 recorded a $47.6-million annual loss. Its shares were off 32 cents at $9.12.

Deere and Co. reported its second-quarter profit jumped 16 per cent to US$547.5 million, up from net income of $472.3 million a year earlier. Deere’s revenue grew six per cent to US$7.1 billion. The company is raising its outlook for the second time this year and its shares climbed $1.71 to US$58.87.

Elsewhere, proxy shareholders of Goldcorp (TSX:G) have overwhelmingly voted down a resolution to suspend mining activities at the company’s Marlin mine in Guatemala so new consultations can be held with indigenous people concerned it’s affecting their health. Its shares were down $1.98 to $44.11.

An shareholders have voted overwhelmingly in favour of merging Quadra Mining Ltd. (TSX:QUA) and FNX Mining Company (TSX:FNX). The combined company will have major copper, nickel and precious metals holdings in Ontario’s Sudbury basin as well as mines in the United States and Chile. Quadra shares gained 43 cents to $12.08 while FNX shares were up 31 cents at $10.46.

Why gasoline prices haven’t fallen

By Dana Flavelle

Wed May 19 2010

The price of oil has dropped 20 per cent in 3 weeks but gas prices at the pump haven't budged.

The price of crude oil has fallen 19 per cent in the past two weeks but prices at the gas pump in Ontario have barely budged. Why?

It depends who you ask.

Everyone agrees the two don’t always rise and fall in tandem, at least not in the short term.

But that’s where the agreement ends.

Gas price watcher Dan McTeague says Canada’s highly concentrated, poorly regulated oil industry is able to “tack on” what he calls “extra mystery cents” to the wholesale price of gasoline paid by gas retailers.

“While you’d think Canadian refiners would observe market forces, they don’t have to,” said the Liberal MPP for Pickering-Scarborough East. “That’s why I’m getting a lot of letters from the public. How is crude going down and the price at the pumps not falling as much as they should?”

Industry consultant Michael Ervin says gas prices normally rise as much as 10 to 15 cents a litre at the start of the summer driving season, partly because demand rises but also because summer fuel is more expensive to make.

But the global economy is weaker, producers have added more ethanol to gasoline, and consumers are switching to more fuel-efficient cars, he noted.

“What we’re seeing here is not as much of a seasonal rise because gasoline is relatively plentiful. So, the good news is consumers today are enjoying a pump price that is 10 or 15 cents a litre less than we would have historically suggested,” said Ervin, vice-president of M.J. Ervin and Associations/Kent Marketing Services, in Calgary.

In a 16-day period this month, the price per barrel for crude oil plunged 19 per cent, yet the price for gasoline at the pumps in Toronto slipped just 5 per cent, according to Spencer Knipping, an oil industry analyst with the Ontario Ministry of Energy.

The price of gasoline in Toronto held steady from March until the beginning of May. The average retail price for a litre of gasoline in Toronto was 97.24 cents Wednesday.

Here’s what happened.

The price of crude oil lost ground as investors worried that the debt crisis in Greece could spread other countries and cast a pall over the long-awaited global recovery. That would put a crimp in demand.

That sent the price of crude oil down to $69.87 U.S. a barrel, from a high of $86.19 US over the previous two week period, according to Knipping’s figures.

The wholesale price of gasoline, which trades on the North American market, also fell though it fell 16 per cent in New York but only 5.8 per cent in Toronto, according to Knipping.

The value of the Canadian dollar plays a role. As it falls, the cost of crude rises. But the Canadian dollar fell just 2.5 per cent during that period, Knipping said.

Knipping said he couldn’t explain why the Toronto wholesale gasoline market has been “more sluggish” in its response to changes in crude oil.

The petroleum industry says it’s highly competitive.

“Generally, if you look over time, the wholesale price of gasoline adjusted for currencies, between Canada and the U.S. track virtually identically,” said Peter Boag, president of the Canadian Petroleum Products Institute. If the spread remains too high it becomes an incentive to export, he explained.

Summer gasoline is more expensive to make, Boag also said, which is why refiner’s gross margins rise at this time of year. Gas produces more fumes in warm weather. “Volatile organic compounds are bad for the environment,” Boag said. “In the summer vapor pressure is reduced to lessen harmful emissions.”

The price of crude oil is just one of the factors that make up the price of gas at the pumps, The other two are the price of wholesale gasoline and competition in the local retail market.

“The three markets can go in opposite directions,” said Spencer Knipping, an oil industry analyst with the Ontario Ministry of Energy. “It’s not unusual and there’s nothing wrong with it.

“You can have movements in crude oil prices, which are determined by world market forces, and the price of gasoline not budging. Or the wholesale gasoline market, which is determined by the North American market, may not be budging.”

Or you can have short-term price wars in local markets, he said.

But while there may be short-term blips, generally speaking “over time, crude oil market prices get passed through to the pump,” Knipping said.

Patricia Mohr, vice president of economics and commodity market expert at Scotiabank, had estimated that crude oil prices would be in the mid-$80 a barrel range for this year and next.

She is now reviewing that forecast because of the persistent debt worries in the euro zone.

“It appears that growth, which was not going to be particularly strong across the euro zone, is going to be marked down again. Global oil demand is still going to rise this year but not as strong as it otherwise would have,” Mohr said.

With files from Madhavi Acharya-Tom Yew