The Motley Fool

Here’s Why Canadian Banking and Oil Stocks Are Circling the Drain Right Now

A bad week or a taste of things to come? The final week of May saw some apocalyptically bad timing with a confluence of missed earnings and ratcheted tensions between Canada’s two biggest trade partners, causing the TSX to slip and battering some of the nation’s favourite banking and energy stocks.

While few sectors were spared the suffering of last week’s sell-off, one of the hardest hit was financials, with painfully high margins hacked from the share prices of some of the biggest bankers. Even gold suffered, and energy took a big hit thanks to depressed crude prices and the shadow of bearishness cast by an uncertain global outlook.

The goalposts have shifted for defensive investment

Could Canadian banks’ bullishness on oil end up weighing on the financials sector if oil-weighted energy stocks continue to trade lower? It’s certainly a possibility; indeed, with a groundswell of interest in green alternatives, a rethink in how portfolio holders invest in the TSX may be on the horizon, with even the biggest oil concerns in the firing line.

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is arguably the highest-risk stock out of the Big Five; however, with so much stalking, the markets, missed earnings expectations and low growth do not a sound investment make. Indeed, bearishness in Canadian banks in general could become a trend for the rest of 2019, with a mix of wins and misses unnerving investors across the board.

Where Scotiabank falls down when compared with its Big Five peers is in its exposure to the Canadian housing market. While there are certainly other factors that a low-risk investor may want to single out, such as its higher international exposure than some other Canadian bankers, the domestic real estate angle may be one of the most off-putting.

Oil prices and trade tensions are killing energy stocks

A brief respite from the carnage that was the final week of May or an ongoing trend? Sadly, the current small rise in Brent crude futures and West Texas crude is unlikely to last: while comments from the Saudi Energy Minister have buoyed oil prices, with the implication being that OPEC may cut production in order to sustain market stability, continuing trade tensions elsewhere continue to weigh on the markets.

One flagship ticker to watch in this space is Enbridge (TSX:ENB)(NYSE:ENB). The energy giant is down right now, with a heavy five-day loss of 6.49%, which was attributable in part to a court decision in the U.S. ruling that an environmental impact statement for the Line 3 replacement project was not adequately carried out. This set Enbridge stock back by a large margin coming after a veritable bloodbath in Canadian oil stocks.

The bottom line

June 18 is likely to be a watershed moment for oil stocks in Canada, with the government deciding whether to go ahead with the expansion of the Trans Mountain pipeline. Investors can expect to see movement in oil-weighted stocks whichever way the decision goes. However, cautious stockholders may want to keep a close eye on world events as oil prices are currently on a hair trigger.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share. Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune. Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. The Motley Fool owns shares of Enbridge. Enbridge and Bank of Nova Scotia are recommendations of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.