U.S. and Canadian stocks sold off swiftly at the open, as markets that have grown addicted to the quantitative easing measures of the Federal Reserve sobered up to the reality that the economic stimulus will likely soon be taken away in gradual steps.
Unlike late Wednesday, when the decline in the S&P 500 outpaced the S&P/TSX composite index, the Canadian index was suffering the bigger losses this morning as the materials sector plunged more than 5 per cent.
The TSX was down 202 points shortly after the open, or 1.6 per cent, at 12,065. The S&P 500 was down 14 points, or 0.9 per cent, at 1,614, while the Dow Jones industrial average was down 139 points, or 0.9 per cent, at 14,973.
The damage in capital markets is widespread and extensive. Aside from the flight from equities, commodities are taking a bruising as a jump in the value of the U.S. dollar has made them more expensive to buy globally. U.S. and Canadian bond yields moved sharply higher this morning to fresh 14-month highs, making bond, dividend stocks and real estate investment trusts no place to hide in the broader market slide.
The selloff ignited after Fed Chairman Ben Bernanke told reporters Wednesday that if its current economic outlook holds, the central bank could begin gradually reducing the size of its $85-million in monthly bond purchases "later this year." And he said the QE program could come to a complete halt in the middle of 2014, when policy makers think the unemployment rate will have dropped to 7 per cent.
Markets didn't get welcome news on the data front this morning, either. U.S. jobless claims rose a greater-than-expected 18,000 to 354,000 last week. Forecasts for the report - which is drawing even more attention now given that the Fed has linked its bond-buying program directly to the recovery in the labour market - was for 340,000 new claims. Nevertheless, one slightly weaker claims report isn't likely to change the Fed's time-frame to start its bond-buying tapering.
In other U.S. economic data this morning, the U.S. Markit flash manufacturing index fell to 52.2 from 52.3 in May. The decline was slight, but the index was well below the 52.7 forecast by economists. U.S. existing home sales data in May came in at an annualized rate of 5.18 million, modestly higher than the 5 million that was expected.
The ICE dollar index, which tracks the U.S. dollar's performance against six other currencies, rose to 81.910 from 81.301 late Wednesday in North America.
Renewed strength in the U.S. dollar is making greenback-denominated commodities less attractive to hold, and traders are particularly nervous about gold because the Fed's $85-billion-a-month bond-buying program was seen to have inflationary risks.
Gold plummeted early this morning to below $1,300 (U.S.) an ounce to 2-1/2-year lows. It was last trading at $1,294.90, down 5.7 percent, or $78. Silver is tumbling even more, down 8.2 per cent at $19.83 for the July Comex contract.
Several technical support levels were taken out in gold today, while holdings in the world's largest exchange-trade fund backed by bullion, the SPDR Gold Trust, fell below 1,000 tonnes for the first time in four years.
The S&P 500 fell 1.4 per cent Wednesday and the S&P/TSX composite index 0.8 per cent. That selloff soon spread to Asia, with traders there also met with more weak economic data out of China. The preliminary reading of a Chinese purchasing managers' index came in at 48.3, missing the median forecast by economists of 49.1. Chinese stocks have now seen all their gains wiped out since the third round of quantitative easing was announced on Sept. 13. The overnight lending market in China showed considerable stress, too, with the SHIBOR rising to an average 12.5 per cent from an average 7.87 per cent Wednesday. The move points to possible cash shortages by the nation's banks.
Most European indexes are down more than 2 per cent this morning. There, a manufacturing index for the euro zone posted a slight beat against expectations, rising to 48.7 compared with an expected reading of 48.6. British retail sales also slightly exceeded economists' forecast. But the data was largely ignored given Wednesday's developments in the U.S.
Bonds fell across the world today as well, and yields on the U.S. and Canadian 10-year government bonds are up sharply, hitting fresh 14-month highs. The 10-year U.S. treasury is at 2.40, up 0.2190 after hitting a fresh 14-month high of 2.4250.