The Canadian stock market rose on Friday, as a surge in copper prices helped offset the impact of higher-than-expected inflation data from the US.
Copper shines amid supply disruptions
The S&P/TSX Composite Index (.GSPTSE) gained 0.3% to close at 21,275.02 points, snapping a two-week losing streak. The materials sector (.GSPTTMT), which includes mining stocks, was the best performer, rising 1.1%.
Copper prices hit their highest level in seven months, as supply disruptions in Panama and Chile threatened to tighten the global market. Copper is widely used in power generation, construction, and electric vehicles, and is seen as a barometer of economic activity.
Ero Copper (ERO.TO) and Lundin Mining (LUN.TO) were among the top gainers, rising 6.2% and 5.3%, respectively. Both companies have operations in South America, where political and social unrest have hampered copper production.
US inflation data spooks investors
The rally in copper and other commodities was partly driven by inflation expectations, as rising demand and supply bottlenecks pushed up prices. On Friday, the US Labor Department reported that producer prices rose 0.8% in January, beating analysts’ estimates of 0.4%. This was the largest increase since September 2018, and followed a 0.3% rise in December.
The data raised concerns that inflation could accelerate faster than the US Federal Reserve anticipates, and force it to raise interest rates sooner than expected. Higher interest rates tend to weigh on stock markets, as they increase borrowing costs and reduce future earnings.
The technology sector (.SPTTTK), which is sensitive to interest rate changes, was the worst performer on the TSX, falling 1%. The sector was also dragged down by disappointing earnings from IGM Financial (IGM.TO) and Air Canada (AC.TO), which dropped 4.8% and 5.8%, respectively.
Outlook for the TSX
Despite the inflation worries, analysts remain optimistic about the outlook for the TSX, which is heavily weighted towards cyclical sectors that benefit from economic recovery. The rollout of COVID-19 vaccines, fiscal stimulus, and pent-up consumer demand are expected to boost growth and corporate profits this year.
The TSX is also trading at a valuation discount to its US peers, which could attract more investors looking for bargains. According to Refinitiv data, the TSX is trading at 16.4 times forward earnings, compared to 22.4 for the S&P 500 (.SPX).
As the world transitions to a greener economy, Canada’s abundant natural resources could also give it an edge over other markets. Copper, nickel, lithium, and other metals are essential for renewable energy and electric vehicles, and Canada has some of the largest reserves in the world.
With copper prices expected to remain high amid strong demand and limited supply, the TSX could see more upside in the coming months.
Source: Reuters
