Losses accelerated on the Toronto stock market during the early afternoon as a partial U.S. government shutdown, in its third day, showed no signs of ending and traders worried that the U.S. is headed for a big economic shock later this month.
The U.S. hits its debt limit Oct. 17 and the government will start to run out of cash on that date and could default on its debts.
The S&P/TSX composite index was down 121.36 points to 12,717.64 in early afternoon trade Thursday, while the Canadian dollar was ahead 0.14 of a cent to 96.93 cents US amid widespread U.S. dollar weakness.
The U.S. Treasury Department warned Thursday that the economy could plunge into a downturn worse than the Great Recession five years ago if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations.
The Treasury’s report says a default could cause the nation’s credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket.
Losses on indexes had deepened during the morning on data showing a much sharper-than-expected deterioration in a key index that measures the U.S. non-manufacturing sector.
The Dow Jones industrials dropped 161.61 points to 14,971.53 as the Institute for Supply Management said its service sector index for September came in at 54.4, down from 58.6 in August and lower than the 57.5 reading that had been expected.
It was hard for traders not to associate the drop with a decline in confidence with the U.S. budget impasse.
The Nasdaq was 54.12 points lower to 3,760.9 and the S&P 500 index gave back 19.45 points to 1,674.42.
Earlier, other data showed that layoffs have decreased dramatically.
The number of Americans seeking unemployment benefits rose just 1,000 last week to a seasonally adjusted 308,000. The less volatile four-week average for applications fell to 305,000, the lowest since May 2007, seven months before the recession began.
The release of the U.S. government’s September employment report had been scheduled for Friday. But the government shutdown has resulted in that release being postponed.
Hopes had been high earlier in the week that Republicans and Democrats would come to a last-minute agreement prior to midnight Monday to avoid the shutdown, and then that the withdrawal of some services would be short-lived.
But now the worry is that the shutdown will carry on for another couple of weeks to the debt ceiling deadline.
“Yeah, there is a definite danger of that happening,” said Gareth Watson, vice president investment management and research at Richardson GMP Ltd.
“The way the right is spinning this shutdown right now is that it is just a mere shutdown of a few national parks, it’s not a big deal. And the first day is not a big deal, the second day is maybe more of a deal but not a big deal but once you get to the next week, I think tempers will start to flare.”
At issue is the Affordable Health Care Act, or Obamacare, which the Republicans oppose.
Republican House Speaker John Boehner has made clear that curbing the health care overhaul that President Barack Obama pushed into law three years ago remains part of the price for ending the shutdown. Traders are concerned that price tag will also apply to raising the debt ceiling.
The metals and mining sector led decliners, down 1.75 per cent as December copper lost five cents to US$3.27 a pound. First Quantum Minerals (TSX:FM) ticked 41 cents lower to C$18.20.
The tech sector also weighed on the TSX with BlackBerry (TSX:BB) down 27 cents to $8. BlackBerry says its latest device will arrive in Canada later this month, but it won’t have the support of Rogers Communications (TSX:RCI.B), which has decided not to stock the new device, after a longtime relationship with BlackBerry on all of its major products.
The industrials group was down 1.6 per cent as Canadian Pacific Railway (TSX:CP) fell $3.08 to $126.68.
Telecoms also weighed with BCE Inc. (TSX:BCE) down 64 cents to $43.28.
The energy group was down 1.4 per cent as November crude on the New York Mercantile Exchange was down 69 cents to US$103.41 a barrel. Talisman Energy (TSX:TLM) lost 30 cents to C$12.52.
The gold sector was off one per cent while December bullion faded $2.70 to US$1,318 an ounce. Barrick Gold (TSX:ABX) was down 28 cents to C$18.74.
The health care segment was positive and Valeant Pharmaceuticals International Inc. (TSX:VRX) was ahead $1.07 to $114.45 after it said the U.S. Food and Drug Administration has approved a new Bausch + Lomb disposable contact lens sooner than expected. Bausch + Lomb was acquired by Valeant for about US$8.7-billion in August.