Toronto's main stock index rose on Tuesday, as a sharp rebound in gold prices lifted mining shares and helped investors look past the Federal Reserve's latest interest rate hike. The S&P/TSX Composite gained 0.9%, closing at 35,824, with materials stocks leading the advance.
Gold bounces back
Gold climbed more than 2%, bouncing off a near six-week low, while copper also moved higher. That combination is particularly important for Canada's benchmark index, because mining and materials companies make up a large slice of the TSX. When metals prices swing, they can move the whole index.
The rebound in gold comes after a period of weakness, as rising interest rates tend to make non-yielding assets like gold less attractive compared with bonds or cash. But Tuesday's bounce suggests some investors saw the recent dip as a buying opportunity, or were positioning for continued inflation pressures.
The Fed's rate hike
The backdrop to Tuesday's move was the Federal Reserve's decision to raise interest rates for the first time in three years. The U.S. central bank also signaled that more hikes could follow, as it tries to cool inflation that has run at multi-decade highs.
For Canadian investors, the Fed's actions matter even though the Bank of Canada sets its own policy. U.S. rates influence global borrowing costs, the value of the U.S. dollar, and the price of commodities like gold and copper, which are priced in dollars. A stronger dollar can weigh on metals, while a weaker one can boost them.
Some strategists argued that markets prefer a central bank that tightens early rather than waiting too long, because it reduces the risk of having to slam the brakes later. That view may have helped stocks shrug off the hike and focus on the positive momentum in commodities.
What it means for investors
For everyday investors, the day's action is a reminder of how closely Canada's stock market is tied to the price of raw materials. When gold and copper rise, mining stocks tend to follow, and that can lift the entire TSX. Conversely, when metals fall, the index often feels the pain.
Investors with diversified portfolios that include Canadian equities should be aware of this dynamic. A portfolio heavy in TSX-listed stocks is effectively making a bet on commodities, even if you don't own a single mining share directly.
The Fed's rate hike also has implications for borrowing costs. Higher U.S. rates can push up yields on government bonds, which in turn can affect mortgage rates and other loans in Canada, even if the Bank of Canada doesn't move in lockstep. For savers, higher rates can mean better returns on cash and short-term bonds, but they can also weigh on growth stocks that rely on future earnings.
Looking ahead, investors will be watching whether gold's rebound has legs or fades as the Fed continues to tighten. They'll also keep an eye on the Bank of Canada, which has its own inflation problem and may follow the Fed with rate increases of its own.
For now, the mood in Toronto is cautiously optimistic. The TSX's gain shows that even in a rising-rate environment, there are pockets of strength—especially when commodities are cooperating.
