Canada’s main stock index gained slightly on Thursday as the market expects U.S. lawmakers to close a deal regarding the debt ceiling soon.
The TSX composite index finished at 20,297.09, adding 0.66 points or 0.0033 percent. The increase marked the index’s second straight gain after previously posting its steepest decline in nearly two months on Tuesday.
The materials sector in the Canadian stock market declined by 1.4 percent as gold and copper prices fell. However, energy and industrials rose nearly one percent and 0.8 percent, respectively.
Shares of Bausch Health Companies jumped 14.59 percent after a Delaware court granted the Quebec-based pharmaceutical company a favorable patent ruling for its top drug, Xifaxan.
In the same session, Lightspeed Commerce stock plunged 12.5 percent after the company forecast lower-than-anticipated quarterly sales. Canada Goose Holdings also lost 10.2 percent after the winterwear producer published a “cautious” note regarding its U.S. business.
Similar to Canada’s stock market, all major indexes on Wall Street also finished in the green on Thursday. The Dow Jones concluded the session at 33,535.91, gaining 115.14 points or 0.34 percent. The S&P 500 rose by 39.28 points or 0.94 percent to end the day at 4,198.05. Meanwhile, the Nasdaq Composite finished at 12,688.84, rising by 188.27 points or 1.51 percent.
Analysts said the increased optimism that the U.S. debt ceiling crisis would end soon offset pressures on mining shares in the Canadian market. SW8 Asset Management president Matt Skipp said a deal on the U.S. debt limit would lead to a “selling opportunity” as the market began to experience the impact of high-interest rates in various aspects of the economy.
Over the past few months, resource and financial stocks have lost dominance in the Canadian stock market due to a decline in oil prices and U.S. banking stress. Although financial authorities previously said that the U.S. banking crisis would have a “muted” impact on Canada’s banking system, it turned out that the situation also affected several Canadian banks that expanded their business to the U.S.
The Bank of Canada earlier raised concerns about the ability of households to keep up with debt payments. The central bank also reported signs of financial stress among home buyers, with many looking for short-term, fixed-rate mortgages to obtain better deals.
Bracing for debt ceiling crisis aftermath
Analysts said the market should prepare for the impact of the debt ceiling crisis even if lawmakers would likely avoid a “catastrophic” debt default.
Penso Advisors founder Ari Bergmann said a Washington resolution would push the Treasury to replenish its cash and pay the country’s dues via massive sales of its bills. Analysts have compared the current situation with the debt ceiling issue in 2017-2018 when the Treasury issued $500 billion of bills in just six weeks.
“My bigger concern is that when the debt-limit gets resolved — and I think it will — you are going to have a very, very deep and sudden drain of liquidity.”
Ari Bergmann, Founder of Penso Advisors
The Treasury’s reserve is expected to hit just over $1 trillion by the end of the third quarter. The Treasury’s effort to improve its cash balance would drain liquidity from the banking sector and increase short-term lending rates. Bank of America estimates that the economic impact would be equivalent to a 25-basis-point rate hike by the Federal Reserve.
Bergmann said the sudden drop in liquidity would also adversely affect risk markets, such as equities. He pointed out that many companies are already experiencing difficulties in financing due to the Fed’s aggressive monetary tightening. Limited liquidity would further inhibit the growth of companies and the overall U.S. economy. This situation can lead to a recession, which analysts say will hit the country in the third quarter.