Lower commodity prices drove the S&P/TSX lower Monday morning, while the Dow Jones industrial average recovered from initial weakness to post mild gains.
The S&P/TSX was down 1.80 per cent, or 167.61 points, to 9,126.48 at 10 a.m. (ET). The Dow gained 0.66 per cent, or 55.04 points, to 8,433.99. The S&P 500 was off 0.31 per cent, or 2.70 points, to 879.47.
Oil fell $1.80 (U.S.) on the New York Mercantile Exchange, to $60.25 a barrel. Gold also traded lower Monday morning, down 1.4 per cent, or $10.40, to $719.90 an ounce.
One reason the markets are continuing their precipitous declines despite hundreds of billions of dollars in government intervention to prop up financial institutions is the unwinding of the yen carry trade, said Scotia Capital analyst Vincent Delisle.
In a carry trade, investors borrow Japanese yen and then invest in foreign markets, to take advantage of interest rate spreads. As the yen gains on the U.S. dollar and the spreads tighten, investors are selling those holdings and converting back to yen to minimize losses.
“For many years, selling yen (at near zero rates) and reinvesting elsewhere (at much higher rates) provided liquidity to investors who then cheerfully climbed up the risk curve,” he wrote in a morning strategy note. “Now that major central banks are cutting their benchmark rates, thus narrowing the spreads with Japan's 0.5 per cent rate, this virtuous circle is unfolding.”
