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Wall Street rises, TSX falls after Fed signals rate hike later this year

Traders work on the floor of the New York Stock Exchange. North American markets were positive Wednesday morning.

TORONTO – The Toronto stock market closed in the red Wednesday while Ny markets turned higher following the U.S. Federal Reserve announced it was keeping its benchmark rate unchanged.

The S&P/TSX composite index closed down 20.07 points at 14,732.98, as the loonie was up 0.51 of a U.S. cent at 81.73 cents.

On commodity markets, the July crude contract gave back five cents to US$59.92 a barrel, while the August gold contract fell $4.10 to US$1,176.80 an ounce.

American markets, down earlier in the day, rebounded to modest gains following the Fed said — following its two-day policy meeting — that even though the U.S. economy has strengthened in recent months, it really wants to see further gains in the job market and higher inflation before hiking rates of interest from record lows.

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The Dow Jones industrial average closed up 31.26 points at 17,935.74, while the Nasdaq added 9.33 suggests 5,064.88 and the S&P 500 was 4.15 points higher at 2,100.44

While the Fed gave no timetable for any rate hike, all but two of its 17 policy-makers think the Fed will raise its key short-term rate some time this year. That rate continues to be held near zero since 2008 and it has helped fuel markets ever since the Great Recession.

Craig Jerusalim, portfolio manager, CIBC Asset Management, said that while it wasn\’t any surprise the Fed didn\’t raise rates on Wednesday, inside a general sense, \”I think they ought to have.\”

\”Quite frankly, the U.S. is no longer in a crisis interest-rate-level environment if you look at employment being strong, wages are rising, housing has firmed up and also the almighty U.S. consumer is spending again.\”

Many analysts state that if the economy keeps improving, the Fed will likely raise its key short-term rate in September.

Jerusalim said the important thing is to be aware that a rate increase is originating.

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\”Obviously everything is data-dependent and things can alter, but I think that the fundamentals suggest that zero interest . . . is no longer needed and therefore they\’ll be searching for any opportunity to get off of these emergency levels.\”

Although the TSX didn\’t take heart in the latest Fed news, Jerusalim asserted was largely to do with the makeup from the Canadian market. The heavily weighted financial sector was the second-worst decliner, down 0.58 percent.

Meanwhile, he doesn\’t purchase the argument that equities have grown to be too expensive.

\”I would argue that valuations are unlikely to fix given (the) stimulus from low interest, low commodity prices which wide disparity between earnings yield and bond yield.\”

\”Right now the 10-year government of Canada yield is less than two per cent while the TSX dividend yield is all about three per cent and the earnings yield is all about six per cent. There\’s a huge difference there and for those three reasons I think that valuations will remain above average,\” he explained.