North American markets move higher on anticipation of U.S. interest rate cuts

TORONTO — North American stock markets moved higher Thursday, with the S&P 500 setting a new record on anticipation of U.S. interest rate cuts while the price of gold rose to a near six-year high.

Investors were intoxicated by the prospect that lower rates mentioned earlier in the week in Europe will spill over across the pond, says Kash Pashootan, CEO and chief investment officer at First Avenue Investment Counsel Inc.

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"The thought of injecting steroids into the market certainly has the market feeling positive," he said in an interview.

The S&P/TSX composite index closed up 63.04 points to 16,574.83 after reaching an intraday high of 16,603.94, less than 70 points off April's record high.

The heavyweight materials and energy sectors led the way as the price of gold reached its highest level since September 2013 and crude oil surged on geopolitical concerns after Iran shot down a U.S. surveillance drone.

U.S. President Donald Trump's language insinuating a response to Iran's action may lead to a war between the two countries pushed up oil prices, Pashootan said.

Crescent Point Energy Corp. led the energy sector, gaining 8.7 per cent, while Eldorado Gold and Yamana Gold Inc. were up 12 and 9.5 per cent respectively in materials.

The August gold contract was up $48.10 at US$1,396.90 an ounce and the July copper contract was up 3.15 cents at US$2.71 a pound.

The August crude contract was up $3.10 at US$57.07 per barrel and the August natural gas contract was down 9.7 cents at US$2.17 per mmBTU.

The Canadian dollar enjoyed its largest gain in more than eight months as it gained almost one cent, trading at an average of 75.81 cents US, up from an average of 74.95 cents US on Wednesday.

In New York, the Dow Jones industrial average was up 249.17 points at 26,753.17 after hitting a high for the year of 26,798.63 that was just short of the all-time high set last October. The S&P 500 index was up 27.72 points at 2,954.18 after reaching a high of 2,958.06, while the Nasdaq composite was up 64.02 points at 8,051.34.

Pashootan said the prospect of lower interest rates should push North American stock markets to rally for the rest of the summer and set new records.

"You basically are at a college keg party and someone just showed up with another case of beers, so there's lots of beverages to keep everyone happy and intoxicated for the rest of summer," he said.

But he added that the euphoria will wear off because cutting rates now will leave central banks with few other tools as the economy weakens further.

Pashootan said the U.S. Federal Reserve, which is expected to cut rates in July and another time in the remainder of 2019, should let the market take its natural course after a decade of equity market growth.

"We are at the stage in the cycle where we need a recession," he said. "A recession helps cleanse some of the excess that exists and the recession is really the next stage in the economic cycle from where we are today."

While markets have risen on the Fed's promise to cut interest rates, failure to follow through would see them to lose up to 10 per cent, he said.

Pashootan also said he expects the Bank of Canada will follow the Fed's rate cut by softening its own language before cutting its rates later this year.

"Canada is historically about six months behind so you're seeing softening language from the Bank of Canada in terms of becoming more open and willing to cut interest rates."

Indexes and currency in this story: (TSX:CPG, TSX:ELD, TSX:TRI, TSX:GSPTSE, TSX:CADUSD)

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