U.S. and Canadian stocks at the open joined global markets in a selloff, as a surprise move by Cyprus to implement a levy on bank deposits ignited concerns about the stability of the European financial sector.
But the major indexes quickly came off their lows, as investors absorbed news that Cyprus may scale back the impact of the levy on some savers.
In early trading, the S&P/TSX composite index was down 23 points, or 0.1 per cent, at 12,806 after earlier dropping about 70 points. The S&P 500 was down 9 points, or 0.5 per cent, at 1,553. The Dow Jones industrial average, which opened down more than 100 points, was last quoted at 14,480, down 34 points, or 0.2 per cent.
U.S. financial stocks were among the biggest decliners, with Goldman Sachs and JPMorgan both off about 2 per cent. Canadian banks were doing a bit better, hovering within 0.3 per cent on both sides of unchanged.
Research In Motion Ltd. was bucking the trend of the broader market, up 3.7 per cent. CEO Thorsten Heins painted an upbeat view of the BlackBerry maker in an interview with the Australian Financial Review today, suggesting Apple Inc.'s iPhone has lost its dominant grip on consumers.
In commodities, industrial metals - which are particularly economically sensitive - were taking the biggest hits. The May copper futures contract in New York was down 2.4 per cent at $3.43 (U.S.) per pound. Crude oil was also suffering a hefty loss, with the May contract down 1.3 per cent at $92.55. But natural gas, which doesn't have much correlation to economic matters, extended its rally from last week, up nearly 2 per cent. And gold was benefiting from some haven money flows, even though strength in the U.S. dollar was limiting its appeal, with the April contract up $13.70 at $1,604 per ounce.
Euro zone leaders struck a deal over the weekend to grant Cyprus a bailout worth 10-billion euros providing there would be a levy that would see those with cash in the island's banks lose between 6.75 and 9.9 per cent of their money. Cyprus would be unable to avoid a default without the rescue, but the imposition of the levy could undermine confidence again in the euro zone.
There are now fears of contagion, whereby depositors in other larger European countries could yank out their own savings from local banks on speculation they could be hit with future levies as well.
Cyprus's parliament was due to vote on the measure today, but it has been delayed until at least Tuesday to allow more time for negotiations. There are reports that the government was working on a proposal that would scale back the levy by imposing less punitive measures on smaller savers.
It's a rude awakening for investors who had witnessed a climb in the Dow Jones industrial average in 10 of the past 11 trading days, bringing gains for the year to more than 10 per cent. A market pullback of some kind was widely expected sooner or later, and the Cyprus situation appears to be the catalyst to get it under way. Some suggest, however, that the European financial sector has better safety nets to protect against a new crisis in the banking system, and the selloff could be short-lived - especially if Cyprus scales back its levy plans on some savers.
European markets are off their earlier loses but are still down sharply. London's FTSE 100 is down 0.7 per cent at 6,442, Germany's Dax down 1.2 per cent and Italy FTSE MIB down 1.7 per cent. European bond yields widened this morning, with Spain's 10-year government bond yield rising 11 basis points to 5.03 per cent.
Asian markets were down even more sharply overnight, with the Nikkei in Japan losing 2.7 per cent and Shanghai falling 1.6 per cent. Asian markets had another worry overnight to contend with. Fresh data showed Chinese home prices rising 1.1 per cent in February, a rise of 2.2 per cent from a year ago, heightening concerns about a property bubble in the country. It was the seventh monthly increase in property values over the past eight months, and the run up in prices could force China's central bank to tighten monetary policy.