TORONTO (Reuters) - Soaring oil prices could become a double-edged sword for Toronto's resource-laden stock market, as the threat of rising inflation begins to nag at the index amid growing economic worries around the world.
Up until recently, the S&P/TSX composite index <.GSPTSE> has largely been able to keep worries over inflation on the back burner and enjoy the benefits of its booming energy sector.
But this month's economic data showed a jump in consumer prices in May thanks to sharply higher gasoline, giving inflation concerns a fresh prominence.
A surprise decision from the Bank of Canada to hold interest rates steady earlier in June, when a quarter-point cut had been widely expected, also highlighted the growing inflation worries.
"The market participants' view has shifted over the last three weeks," becoming more concerned about the risks of inflation than faltering economic growth, said Clement Gignac, chief economist at National Bank of Canada in Montreal.
Consumer prices rose 2.2 percent in May, data showed. And the 1 percent increase from April to May was the largest monthly rise since the 2.6 percent posted in January 1991.
Bank of Canada Governor Mark Carney later characterized the global spike in energy and food prices as a "commodity super cycle" during a speech in Calgary, and said the unprecedented rise called for a "relentless focus on inflation."
Since the beginning of the year, Bay Street has been able to look to the energy sector for support, with high-flying oil prices offering a windfall for the bottom lines of energy companies, which make up about 30 percent of the Toronto Stock Exchange's main index.
But crude's seemingly unstoppable climb to ever-higher records, including a peak near $143 a barrel on Friday, has reached a point where worries are deepening over the inevitable impact on consumer prices, as well as on the cost of running a business, analysts said.
"It's reaching a level at $140 a barrel where it's starting to hurt," said Rick Hutcheon, president and chief operating officer at RKH Investments.
"I think most rational portfolio managers would have to come around to the view that the magnitude of the gains that we have seen aren't going to continue in the short term," added Hutcheon.
As well, worries have crept into the market over the possible erosion in demand for oil due to the high price, although some analysts note that growing demand in emerging nations could offset any decrease in countries such as the United States.
Since January, the TSX's energy sector has risen 24.5 percent, helping the benchmark soar to record highs along the way, hitting a peak of 15,154.77 at the beginning of June.
But both have stumbled this past week, with the index caught up in resurgent worries over the health of financial institutions and the global economy, and tripped up by volatile resources. The index was down 1.5 percent on the week.
The energy sector was knocked around in a series of volatile sessions, falling more than 6 percent off the week's high, before eventually ending nearly 1 percent lower as oil prices popped up to new records.
Analysts said some worries about demand have emerged, but they were also quick to point out that much of the loss could be attributed to profit-taking ahead of the end of the quarter and the halfway mark for the year.
Meanwhile, policy makers around the world have been ratcheting up talk over inflation fears, including the U.S. Federal Reserve, which decided this past week to pause in its aggressive rate cutting campaign.
The U.S. central bank voiced a greater concern over the threat of inflation, confirming the shifting opinion of market-watchers over the past few weeks, said Gignac.
While some analysts note that worries over the impact of oil prices are unlikely to spell the end of gains in the energy and resource space, others say that concerns over how long high prices can last may prompt some investors to look elsewhere to place their bets.
"We've had an awfully good run, maybe it's time to rotate into some of the lesser loved sectors," noted Hutcheon.