RPT-BAY STREET-Bank of Canada is the least of TSX’s worries

(Repeats July 18 column without changes)

* Bank of Canada rate hike likely won’t hurt TSX

* Near-term rate increases mark return to normality

* Stocks to focus more on earnings, global outlook

By Jennifer Kwan

TORONTO, July 18 (BestGrowthStock) – The Bank of Canada’s rate hike
campaign should not hurt Canadian stocks as badly as past
tightening cycles, given that only moderate moves are expected
and rates will remain near record lows for some time.

Markets are betting on a 25 basis point increase on
Tuesday, which would bring the central bank’s key interest rate
to 0.75 percent. Last month Canada became the first Group of
Seven industrialized nation to raise rates following the global
financial crisis. (BOCWATCH: )

But analysts say the tightening, and other hikes expected
to follow, will have little impact on the TSX composite index
(.GSPTSE: ). Instead, traders and money managers will be focused
on the health of the global economic recovery.

“This move in interest rates — and those that will come
for a while here — I don’t think are going to fill the
financial markets with dread or have a huge impact on the stock
market at all. What they really point to is some return to
normalcy,” said Bob Gorman, chief portfolio strategist at TD
Waterhouse.

Traditionally it’s bad news for stock markets when central
banks take away the punch bowl of easy money. Higher borrowing
costs typically slow the economy, cut into corporate profits
and increase the appeal of some competing fixed-income
investments.

Most vulnerable are rate-sensitive sectors like utilities,
banks and other financial institutions, as well as high
dividend stocks like many found in the telecoms sector.

But analysts say this tightening cycle is less worrying for
stocks, pointing out that interest rates remain low in absolute
terms. The central bank cut its key rate to a record low 0.25
percent in April 2009 in an aggressive response to the
financial crisis and resulting recession.

A recent Reuters poll showed the overnight rate is expected
to rise to just 1.25 percent by year end and to 2.5 percent by
the end of 2011. Even then, rates will be lower than they were
in early 2008. (POLL20: ) [CA/POLL]

By comparison, the central bank raised rates by 2.5
percentage points from late 2004 to mid-2007, lifting its key
rate to 4.5 percent. [ID:nN01107326]

“We’re going to shift from an extraordinarily accommodative
monetary policy to something that is getting closer to normal,”
said Gorman.

However, he cautioned that Canadian stocks could retreat in
the near term if the central bank were unusually hawkish.

BIGGER WORRIES FOR INVESTORS

While rates staying close to historic lows may be
supportive for Canadian stocks, market watchers said this is
overshadowed by the global economic outlook.

This concern has been fueled by a string of tepid U.S. data
and minutes from a U.S. Federal Reserve policy meeting,
released on Wednesday, that said additional steps may be needed
to shore up the soft U.S. economy.

These come on top of fears about the recent euro-zone debt
crisis and slowing growth in China, a major customer for the
many natural resource firms listed in Toronto.

“Three quarters of our market is impacted by what’s going
on in the global economic environment,” said Murray Leith,
director of research at Odlum Brown in Vancouver.

“Our equity markets, day to day and over the long term, are
going to take their cue from the health of the global economy
and not so much what the Bank of Canada does.”

Investors will also take their cues in the near term from
Canadian and U.S. corporate results. Heavyweight companies
reporting over the next few weeks include Encana (ECA.TO: ), Teck
Resources (TCKb.TO: ), Potash Corp (POT.TO: ), Suncor Energy
(SU.TO: ) and Barrick Gold Corp (ABX.TO: ).

“The impact, good or bad, is going to come from corporate
earnings,” said Serge Pepin, head of investments at BMO
Investments Inc.

While equity investors may give the Bank of Canada limited
attention next week, it will remain the major focus for
currency and fixed-income markets. With the actual rate
decision all but certain, traders are expected to focus the
tone of the accompanying statement.

If the bank signals increased concern about global risks or
the pace of the country’s rebound, the Canadian dollar could
slide. But if the bank sticks to its bullish outlook, the
currency could head higher.

“You might get a bounce or some strength out of the
Canadian dollar if the comments are hawkish and the bank
governor signals more aggressive hikes going forward,” said
Francis Campeau, broker at MF Global Canada, in Montreal.

($1=$1.06 Canadian)
(Reporting by Jennifer Kwan; editing by Jeffrey Hodgson and
Rob Wilson)

RPT-BAY STREET-Bank of Canada is the least of TSX’s worries