Wednesday Broke the Oil Correlation, Not Friday
The TSX Composite closed at 35,800.89 on Friday, roughly flat for the week and 208 points below the 36,009.40 level where it closed Monday. That two-tenths-of-one-percent net move hides a week that swung more than 600 points top to bottom, and the direction of that swing did not track oil the way it has for most of the past two months.
Wednesday delivered the biggest single move: the index fell 584.18 points to 35,751.43, a decline the exchange attributed to losses in the basic materials sector, not energy. West Texas Intermediate crude had already begun sliding out of its mid-month peak by that point, down from above $107 a barrel on September 15 to below $97 by Monday. If the old pattern held, a falling oil price should have pulled Canadian energy names lower and dragged the broad index with them. Materials led the Wednesday drop instead.
Friday reversed part of the loss, and the sectors doing the work were consumer discretionary, financials, and real estate investment trusts. Energy did not lead the rally any more than it had led the Wednesday selloff. For a market that has spent two months trading as a leveraged bet on the Strait of Hormuz, a week in which the biggest down day and the recovery day both ran through non-energy sectors is the notable fact, more notable than the net weekly change itself.
The Yield Story Oil Left Behind
The TSX held inside a roughly 630-point range across the five weeks shown, with the Wednesday drop and Friday recovery both landing well inside the range set by the September 3 high near 36,633 and the August 25 close of 36,957.60.
The Wednesday drop reflected losses concentrated in the basic materials sector rather than energy. The Friday close of 35,800.89 sits 0.58 percent below the level where the index closed Monday.
While WTI crude fell toward $93 a barrel by Friday, from a September 15 high above $107, the bond market moved the opposite way. The US 10-year Treasury yield closed at 5.18 percent Thursday, up from 4.96 percent the previous Monday, a fresh two-decade high driven by data showing input costs at their steepest four-year pace and by comments from Federal Reserve Governor Michael Barr backing a rate hike if inflation does not moderate soon. The 30-year Treasury yield reached 5.47 percent the same day, extending a climb that first passed its highest level since 2007 back in August.
That divergence matters because the two stories were supposed to move together. The premium in oil and the premium in bond yields both trace back to the same conflict: supply risk on one side, inflation risk on the other. This week the geopolitical premium in oil compressed on reports of possible truce progress between the US and Iran, while the inflation premium in yields kept building on hard data that has nothing to do with a ceasefire. Government of Canada yields have tracked the US move higher through September, which is the transmission channel that matters more for mortgage renewals than the price of crude itself.
What the Loonie Is Actually Pricing
USD/CAD closed the week near 1.4147, extending a third consecutive weekly decline for the Canadian dollar. The conventional read on the loonie ties it to oil: a falling crude price should weaken CAD further, and a stable or rising one should offer support. Oil fell hard this week, yet CAD weakness was already established before Wednesday, and the currency did not recover alongside the TSX bounce on Friday the way that correlation would predict.
The more useful explanation sits in the yield gap. Canada two-year government bond yields sit near 3.35 percent against a US short-term yield that has moved well above it, a gap approaching 150 basis points in favour of the US dollar. The Bank of Canada holds its policy rate at 2.25 percent and does not meet again until October 28. Between now and then, every basis point the US 10-year adds without a matching move in Canada widens the gap the loonie is pricing, independent of what oil does next.
A Canadian energy rally would help CAD on its own terms. It would not, based on this week, be enough to offset a Federal Reserve that sounds closer to hiking than cutting.