U.S. and Canadian stock markets opened with steep losses, as a breathtaking plunge in Japanese stocks overnight created concern that it could foreshadow a broader correction in global equity markets. A surprisingly weak economic report out of China, along with heightened worries that the U.S. Federal Reserve may soon start curtailing its massive bond-buying program, have given investors reason to take some profits after U.S. stocks' relentless climb this year into record territory.
At just past 10 a.m. (ET), the S&P/TSX composite index was down 129 points, or 1 per cent, at 12,623; the S&P 500 was down 13 points, or 0.8 per cent, at 1,643; and the Dow Jones industrial average was down 85 points, or 0.5 per cent, at 15,222.
Most European markets were suffering bigger losses, with London's FTSE down 2.4 per cent and Germany's Dax down 2.7 per cent.
Japan's Nikkei took a brutal fall overnight, losing more than 7 per cent in heavy volumes, as the value of the yen spiked as much as 2.3 per cent against the U.S. dollar. It was the biggest one-day loss in Japanese equities in more than two years, but still only represents a fraction of that market's rally so far this year as investors bid up stocks in the wake of Prime Minister Shinzo Abe's massive stimulus program. Japanese 10-year bond yields surged to their highest level in more than a year.
Investors were initially spooked Wednesday afternoon after minutes released from the latest Federal Reserve policy meeting showed some members in favour of tapering the central bank's bond-buying program - and Chairman Ben Bernanke's testimony in front of Congress seemed to leave that door open. That stimulus measure has been key to the market's post-recession recovery.
Then overnight, China released surprisingly weak manufacturing data, with factory output shrinking for the first time in seven months. The flash HSBC Purchasing Managers’ Index for May fell to 49.6, slipping under the 50-point level separating expansion from contraction for the first since October. It was one of the more worrisome signals of late that growth rates in the vital Chinese economy were starting to slow.
Europe's own factory data released this morning weren't terribly uplifting, either. Markit’s composite purchasing managers index for the euro zone for May rose 47.7 in May from 46.7 in the previous month, but remained in contraction territory.
U.S. economic data this morning was more upbeat, but not enough to turn around market sentiment. U.S initial jobless claims for last week fell 23,000 to 340,000, better than the drop to 345,000 that was expected. The U.S. May flash manufacturing PMI fell to 51.9, weakening from April's 52.1 but better than economists' forecast for 50.8. And new home sales in April rose 2.3 per cent to 454,000, beating forecasts for 425,000.
The TSX is also facing the headwind of lower prices for economically sensitive commodities this morning. Crude oil futures in New York were down 1.6 per cent for the active July contract, to $92.70 (U.S.) per barrel, while the July copper futures contract was down 3.1 per cent at $3.28 per pound.
Gold was faring much better, thanks to the U.S. dollar's fall against the yen and the flight to safety overnight as equity markets tanked. The June contract was up $22, or 1.6 per cent, at $1,389 per ounce.
Among stocks on the move this morning was Toronto-Dominion Bank, which reported second-quarter profit of $1.78 a share, short of forecasts for $1.86. The stock opened down 0.5 per cent.
Hewlett-Packard Co. shares were up 8 per cent after late Wednesday reporting better-than-expected quarterly earnings and guidance.