S&P/TSX index outlook as Canada yield curve inversion intensifies

The S&P/TSX index has sold off in the past few days amid rising concerns about commodity prices and the health of Canada’s economy. It retreated to a multi-week low of C$19,980, which was significantly lower than this year’s high of $20,847.

Rising short-term bond yields

The biggest challenge for the TSX index is the recent performance of Canada’s bond market. Data shows that the yield of a one-year government bond has jumped to 4.70%. In the same period, the 1-month note is yielding 4.55% while the 2-year has a yield of 4.2%. The yield curve has clearly inverted, with the 10-year and 30-year yielding 3.3% and 3.2%, respectively. 

Bond yields have also inverted in most countries, signaling that investors are sensing danger about the state of the economy. In the United States, the yield curve inversion has dipped to the lowest level since the 1980s. Therefore, many investors in the US and Canada have started moving back to bonds, which are providing reliable returns. 

The TSX index has also retreated because of the performance of key commodities. Crude oil, which is a major player in Canada, has moved sideways in the past few months. Brent has been stuck at $83 while the West Texas Intermediate (WTI) remains at $77. 

There are signs that commodity prices will stage a comeback because of the strong Chinese economy. Data published on Wednesday showed that the country’s manufacturing PMI jumped in February, signaling that the economy is doing well. This could lead to more demand for industrial metals like silver and copper.

Several TSX index constituents have done well this year. Bausch Health is the best-performing constituent, having jumped by 50%. Dundee Precious Metals, Methanex, Bombardier, and Algoma Steel Group. 

On the other hand, the worst performers are mostly in the commodity industry. First Majestic Silver shares have plunged by over 26% while Precision Drilling, Vermillion Energy, Trisura, and MAG Silver have all plunged by over 20%.

S&P/TSX index forecast

TSX chart by TradingView

The daily chart shows that the S&P/TSX index has pulled back in the past few days and is sitting close to the lowest point since January 12. As I wrote in this article, the index has formed an inverted head and shoulders pattern. It has moved slightly below the 61.8% Fibonacci Retracement level.

Therefore, I suspect that the index will remain in a consolidation phase in the coming days and then resume the bullish trend. If this happens, it could retest the resistance point at $20,625.