The Toronto Stock Exchange slipped to a two-week low Thursday as weakness among financial companies outweighed gains in Canadian resource stocks, offering investors another reminder of how heavily the country’s main index depends on its banks.
The S&P/TSX Composite Index finished August 20 at 36,365.42, down 36.37 points, or 0.1%, for its lowest close since August 6. Financial stocks were among the main sources of weakness as global investors continued watching volatility in bond markets.
A decline of 0.1% is hardly dramatic, particularly after the TSX’s strong performance this year. What makes Thursday’s movement noteworthy is where the pressure came from.
Financial companies account for a significant portion of the Canadian market. Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, CIBC and National Bank are among the country’s largest publicly traded companies, meaning relatively small movements in bank shares can have a noticeable effect on the broader index.
The timing is also important because Canadian banks are about to enter another earnings season. Scotiabank is scheduled to report its third-quarter results on August 25, followed by results from other major lenders. Investors will be looking for evidence that Canadian banking remains resilient despite slower economic growth and continued uncertainty surrounding Canada-U.S. trade.
There were encouraging signs last quarter. Royal Bank, TD and CIBC all exceeded profit expectations in the second quarter, helped by domestic growth and strength in capital markets. That performance challenged some of the more pessimistic expectations surrounding Canada’s financial sector earlier in the year.
This quarter will bring a new set of questions. Investors will be watching loan growth, credit losses and mortgage performance, but they will also be interested in wealth management and capital markets, which have become increasingly important sources of earnings for several Canadian banks.
Interest rates remain another factor. Banks can benefit from certain rate environments, but changes in borrowing costs also affect mortgage demand, business lending and the ability of households to manage existing debt.
The rest of the TSX provides some diversification from those risks. Energy and mining companies can perform well when commodity prices rise, while industrial and technology companies respond to different economic forces. Thursday’s resource gains helped offset some of the weakness in financial stocks.
For investors, a single down day does not establish a trend. The TSX remains close enough to recent highs that normal market movements can produce new milestones or short-term pullbacks within a matter of days.
The more useful signal may come next week. Once Canada’s major banks begin opening their books, investors will have much more information about the health of the country’s most influential stock-market sector.
