The Toronto stock market plunged more than 200 points Monday, adding to last week’s sharp losses amid signs that the U.S. Federal Reserve is getting ready to cut back on stimulus. There was also more worry about China’s economic rebound.
At about 10:30 a.m. (ET), the S&P/TSX composite index was down 219 points, or 1.8 per cent, at 11,775, in a broad-based selloff on top of a 1.57 per cent slide last week.
The Canadian dollar continued to feel the pressure of a rising greenback, tumbling 0.78 of a cent to 94.86 cents US, its lowest level since early October, 2011.
U.S. indexes were also sharply lower, with the Dow Jones industrials down 221 points, or 1.5 per cent, at 14,575 on top of a 1.8 per cent cent slide last week.The S&P 500 index was down 28 points, or 1.8 per cent, at 1,563.
Markets started to nosedive last Wednesday after Fed chairman Ben Bernanke signalled that the U.S. central bank could start to wind up its bond buying program this year and wrap it up by the middle of next year.
Huge amounts of stimulus from central banks have played a huge role in the economic recovery since the 2008 financial collapse by keeping long term rates low. It has also been a huge support for stock markets.
China also pressured markets last week after a private survey showed manufacturing in China contracted at a faster pace in June to a nine-month low. Moreover, Chinese economic growth slowed unexpectedly in the first quarter to 7.7 per cent and forecasters have cut their growth outlook for the year.
China was also in focus Monday after China allowed commercial lending rates to soar in a move analysts said was aimed at curbing a booming underground lending industry.
Analysts say the spike late Thursday in the country’s interbank lending rate to over 13 per cent was part of an effort to trim off-balance-sheet lending that could threaten the financial stability of the world’s second-largest economy.
But markets feared the move could also hurt economic growth. China’s major state-owned banks are unwilling to lend to any but their biggest clients, so the vast majority of smaller businesses must rely on informal lending.
Mainland China’s Shanghai Composite Index plummeted five per cent to a four-year low.
Indications that the Fed will ease up on its $85-billion (U.S.) of bond purchases each month continued to send the U.S. dollar and bond yields higher. The benchmark 10-year Treasury rose to 2.636 per cent, close to a two-year high and up from 2.25 per cent prior to Bernanke’s news conference last Wednesday. The yield had been as low as 1.6 per cent at the beginning of May.
The stronger greenback also helped depress commodity prices, along with demand concerns. That is 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 led declines, down 3.44 per cent as July copper on the New York Mercantile Exchange closer to the $3 level, down another seven cents to $3.02 a pound. Teck Resources shed 87 cents to $21.90.
Gold prices also continued to fall, down $6 to $1,286 an ounce, pushing the gold sector down almost three per cent. Bullion fell to three-year lows last week in the wake of the indication by the Fed of lower bond purchases. Goldcorp Inc. fell 75 cents to $24.85.
Elsewhere in the gold sector, slumping gold prices have resulted in Barrick Gold Corp. intensifying its downsizing plan. The miner is eliminating about 100 jobs or almost a third of its corporate staff at its headquarters in Toronto and other offices. Barrick is also dealing with operational and regulatory issues at some of its mines and projects. Barrick shares fell 78 cents to $16.93.
Meanwhile, Goldman Sachs cut its outlook on the metal for 2013 and 2014, citing growing price risks from an improving U.S. economic picture. The bank now expects gold to end this year at $1,300 an ounce, down 9.4 per cent on its previous forecast. Goldman Sachs sees gold ending 2014 at $1,050 an ounce, down 17.3 per cent on its earlier outlook.
The energy sector fell 1.8 per cent while the August crude contract slipped 54 cents to $93.15 a barrel. Canadian Natural Resources declined 58 cents to $28.79.
Traders also looking at what damage heavy rains and flooding will have on Alberta’s energy business.
Enbridge Inc. is working to contain and clean up a weekend spill of synthetic crude into a wetland area and small lake in northern Alberta. Enbridge also shut other pipelines in the area as a precaution, including the Athabasca and Waupisoo pipelines, as the province grapples with major flooding, including in the city of Calgary where Enbridge has its head office.
Enbridge said in its initial assessment that unusually heavy rains may have resulted in a ground movement that affected the pipeline, which is part of its Athabasca network. Its shares were down 66 cents to $42.85.
The industrials fell 1.42 per cent as Canadian Pacific Railway gave back $3.47 to $120.63.
Bank stocks were also weak as Scotiabank stepped back 51 cents to $55.32.
Elsewhere in Asia, Hong Kong’s Hang Seng fell 2.2 per cent, Japan’s Nikkei 225 index, the regional heavyweight, fell 1.3 per cent, South Korea’s Kospi lost 1.3 per cent while Australia’s S&P/ASX 200 shed 1.5 per cent.
European bourses also registered sharp losses as London’s FTSE 100 dropped two per cent, Frankfurt’s DAX lost one per cent while the Paris CAC 40 fell 1.84 per cent.