The Toronto stock market headed for its biggest decline since early April on Thursday following a disappointing read on Chinese manufacturing and the U.S. Federal Reserve’s latest indication it’s preparing to wind down economic stimulus.
The S&P/TSX composite index tumbled 200.68 points to 12,067.61, the biggest one-day drop since the index fell nearly 260 points on April 3. All sectors participated in Thursday’s selloff, which followed a 99-point decline on Wednesday.
The Canadian dollar tumbled 0.8 of a cent to 96.54 cents US, on top of a loss of six-tenths of a cent Wednesday, amid a sharp retracement in commodity prices after a bigger contraction this month in China’s manufacturing sector.
U.S. indexes were also firmly in negative territory. The Dow industrials dropped 223.17 points to 14,889.02 after dropping 206 points Wednesday, the Nasdaq fell 53.07 points to 3,389.5 and the S&P 500 index lost 26.82 points to 1,602.11.
Markets responded negatively after Fed chairman Ben Bernanke confirmed Wednesday that the central bank’s bond purchases will likely slow down this year and the end of next year. The timing depends on economic data. But the fear is that rising interest rates won’t be far behind.
The Fed has been buying $85-billion (U.S.) worth of financial assets each month to keep long-term interest rates low in the hope of boosting borrowing and spending. But the inflows of cash into financial markets have also helped fuel a boom on many stock markets this year, including the Dow industrials which had been up more than 16 per cent for the year.
Analysts say that investors weren’t expecting Bernanke to say the program could end so quickly, and are now having to adjust their holdings to anticipate higher U.S. interest rates.
“Our U.S. economists now expect the Fed to announce a reduction in the pace of asset purchases to $70-billion per month at the September meeting and expect asset purchases to be concluded by March 2014,” said a commentary from Barclays Research.
Some analysts wondered why markets viewed this as such a negative since higher rates should mean the economy is doing better.
“We have got away with murder recently with the low interest rates,” said Ron Meisels, president of Phases & Cycles Inc. in Montreal.
“People are naive not to think that interest rates are going to eventually have to move up, which means together that bond prices are coming down (and yields going up). Is it going to happen today? No.”
In economic news Thursday, there was good news from the housing sector as U.S. sales of previously occupied homes surpassed the five million mark in May, the first time that’s happened in 3 1 / 2 years. The National Association of Realtors says home sales rose 4.2 per cent in May to a seasonally adjusted annual rate of 5.18 million, up from April’s pace of 4.97 million.
The median price of a home rose in May to $208,000, the highest level since July 2008. That represented a 15.4 per cent jump from a year ago.
Markets have been volatile since May 22 when Bernanke first mentioned that the central bank could be ready to start tapering those bond purchases. Indications of such a slowdown of bond purchases have also send yields higher, with the benchmark U.S. 10-year Treasury down from early highs but still at 2.38 per cent late Thursday morning, up from 2.25 per cent before the Fed’s announcement Wednesday afternoon. The yield was as low as 1.6 per cent at the beginning of May.
Those rising yields have also punished interest sensitive stocks on the TSX such as utilities, telecoms, REITs and pipelines. For example, the utilities sector is down almost eight per cent this month while telcos have fallen about five per cent.
Resource stocks have also taken a beating on the TSX, reflecting lower commodity prices and sluggish global growth, with the base metals sector down 12 per cent this month and 27 per cent year to date.
Those stocks led decliners Thursday after HSBC said that the preliminary version of its monthly purchasing managers index for China fell to a nine-month low of 48.3 in June, down from 49.6 in May. Numbers below 50 indicate a contraction in the manufacturing sector.
June factory output decreased, a reversal from gains in the month before, while new export orders and new orders overall decreased at a faster rate.
Commodities slid as a result of demand concerns following the disappointing Chinese data and the higher U.S. dollar.
A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals which are dollar-denominated.
The base metals sector lost almost five per cent while July copper on the New York Mercantile Exchange lost eight cents to US$3.06 a pound. Teck Resources (TSX:TCK.B) fell 67 cents to C$22.43 while HudBay Minerals (TSX:HBM) dropped 49 cents to $7.10.
The gold sector was also down almost five per cent while bullion tumbled with the August contract sliding $76 to US$1,298, falling below $1,300 for the first time in nearly three years. Aggressive monetary stimulus programs by central banks have supported gold prices since the 2008 financial crisis and subsequent recession, partly because of worries about inflation. But prices have eroded as inflation remains tame and the global economic outlook continues to improve..
Goldcorp Inc. (TSX:G) faded $1.36 to C$25.57 while Barrick Gold Corp. (TSX:ABX) declined $1.05 to $17.50.
The July crude contract fell $2.68 to US$95.56 a barrel. pushing the energy sector down 1.7 per cent. Suncor Energy (TSX:SU) gave back 44 cents to C$31.07.
The utilities sector gave back 2.65 per cent while TransAlta Corp. (TSXL:TA) declined 32 cents to $13.07.
The telecom sector shed 1.9 per cent and BCE Inc. (TSX:BCE) was down 73 cents to $43.39.
Bank stocks also contributed to the dismal showing on the TSX with Royal Bank (TSX:RY) down 92 cents to $59.77.