Canada’s main stock index dropped nearly 1,000 points early afternoon Friday as the next nominee to lead the U.S. Federal Reserve prompted a sell-off in precious metals.
“You’re seeing metals retreat for the first time, and I’d say a bit of a meaningful retreat,” said Allan Small, senior investment adviser at iA Private Wealth.
The S&P/TSX composite index was down 992.37 points at 32,023.76.
The April gold contract was down US$348.80 at US$5,006.00 an ounce on Friday.
However, when looking at the past year, gold prices have risen more than 70 per cent.
Small said it appears that the decline in metal prices on Friday was a reaction to an announcement by U.S. President Trump that Kevin Warsh will be his choice to replace Jerome Powell as U.S. Federal Reserve chair.
“Kevin Warsh, who is more hawkish perhaps than maybe some of the other candidates seem to be, that gave a bit of a boost to the U.S. dollar and a bit of a selloff for gold and some of the metals that obviously are priced in U.S. dollars and act as a hedge against the U.S. dollar,” Small said.
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“That would probably be the main driver of the decline on the TSX today.”
In New York, the Dow Jones industrial average was down 529.07 points at 48,542.49. The S&P 500 index was down 55.96 points at 6,913.05, while the Nasdaq composite was down 225.71 points at 23,459.41.
Whoever leads the Fed has a big influence on the economy and markets worldwide by helping to dictate where the U.S. central bank moves interest rates. Such decisions lift or weigh on prices for all kinds of investments.
A fear in financial markets, one that’s pushed up gold’s price and weakened the U.S. dollar’s value, is that the Fed will lose some of its independence because of Trump.
“I think Kevin Warsh is a good choice in that if they were to choose some of the other candidates, it might be conceived that the president is trying to control the Federal Reserve, that the Federal Reserve would not be considered independent,” Small said.
The longtime assumption has been that the Fed can operate separately from the rest of Washington so it can make decisions that are painful in the short term, such as keeping interest rates high and grinding down on the economy, to fix a long-term problem, such as getting inflation back down to its goal of two per cent.
Meanwhile, Small said large technology companies were weighing on the U.S. market.
“We saw some big-cap tech earnings from the likes of Microsoft. That was the big one, that really caused a bit of a sell-off. We saw Microsoft sell off 10 per cent yesterday,” he said.
Microsoft reported its latest earnings on Thursday, with stronger profit and revenue than analysts expected. However, investors honed in instead on how much Microsoft is spending on investments.
The Canadian dollar traded for 73.69 cents US compared with 73.99 cents US on Thursday.
The March crude oil contract was up 26 cents US at US$65.68 per barrel.
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