TSX falls as valuation and U.S. rate hike concerns weigh

TORONTO (Reuters) - Canada’s main stock index fell on Tuesday as worries about elevated valuations and higher U.S. interest rates offset a rally in oil prices.

A man walks past an old Toronto Stock Exchange (TSX) sign in Toronto, June 23, 2014. REUTERS/Mark Blinch

The index has rallied 27.5 percent since hitting a three-year low in January, helped by a rebound in commodity prices and low global interest rates. Last week it reached a 13-month high of 14,855.69, raising concerns that the rally might be overdone.

“We would say that the market has become more expensive and that leads us to become more defensive,” said Youssef Zohny, portfolio manager at StennerZohny Investment Partners.

The combination of higher valuations and possible interest rate increases may lead to a “correction in equity markets,” Zohny added.

Traders raised bets on a Federal Reserve interest rate hike before year-end after New York Fed President William Dudley said an increase in September was possible.

The Toronto Stock Exchange’s S&P/TSX composite index closed down 73.58 points, or 0.5 percent, at 14,703.44. Nine of the TSX’s main 10 groups were in negative territory.

The heavyweight financials group was the biggest drag on the index. It fell 0.5 percent.

The materials group, which includes precious and base metals miners and fertilizer companies, lost 0.7 percent.

It included a 1.5 percent drop in the shares of Barrick Gold Corp to C$27.39. Spot gold rose 0.5 percent, but some earlier gains were pared.

The energy group dipped 0.2 percent despite oil reaching a five-week high.

Investors in energy stocks have begun to track the broader trend for equity markets rather than near-term fluctuations in crude oil, said Zohny.

U.S. crude oil futures settled up 84 cents at $46.58 a barrel as sources at OPEC spoke of Saudi Arabia’s apparent desire for higher crude prices while Russia met the producer group to discuss the market. [O/R]

Canadian Natural Resources Ltd lost 1 percent to C$41.54 and pipeline operator TransCanada Corp declined 1.5 percent to C$61.37.

Avigilon Corp, which sells video surveillance cameras, slumped 25.2 percent to C$9.98 after a string of analysts lowered their views on the stock after its quarterly results.

Shares in Alimentation Couche-Tard Inc rose 3.1 percent to C$62.00. The convenience store operator is in the lead to acquire U.S.-based CST Brands Inc, according to two sources familiar with the matter.

Canadian manufacturing sales rose in June to recover much of the previous month’s decline, led by gains in machinery and transportation equipment sales.

Additional reporting by Alastair Sharp; Editing by W Simon and James Dalgleish