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Trader Peter Mancuso, right, works on the floor of the New York Stock Exchange Thursday, Sept. 20, 2012. (Richard Drew/AP)

Trader Peter Mancuso, right, works on the floor of the New York Stock Exchange Thursday, Sept. 20, 2012.

(Richard Drew/AP)

At the open: Stocks dive as investors fret over Fed policy, Portugal banks Add to ...

Signals that investors have become too complacent about the threat of higher interest rates, and an unfolding banking crisis in Western Europe, have sent global markets into a tailspin this morning.

Today is rapidly shaping up to become one of the sharpest sell-offs in equities so far this year. In early trading, the Dow Jones industrial average was down 150 points, or 0.8 percent, at 16,834 while the S&P 500 was down 17 points, or 0.8 per cent, at 1,955, and the Nasdaq was down 65 points, or 1.5 per cent, at 4,353. The S&P/TSX composite index was down 107 points, or 0.7 per cent , at 15,108.

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Gold, which typically benefits from its safe-haven status at times of market turmoil, is doing just that, with spot metal trading near 3 1/2-month highs this morning. The August futures contract is up 1.4 per cent at $1,342.80 (U.S.) per ounce, and gold mining on the TSX is the only one of the 10 major sectors seeing gains, up by about 2 per cent.

Shares of TSX energy producers were down 1.4 percent, with Suncor Energy Inc losing 1.6 percent to $44.91 and Canadian Natural Resources Ltd declining 1.7 per cent. Financials were down about 0.6 per cent.

The selling pressure started overnight in Europe, where the focus turned to fresh concerns about the health of Portugal's financial sector. The biggest banking group in the country, Banco Espirito Santo, has seen accusations that its main holding company covered up a $1.8-billlion (U.S.) hole in its accounts.

Portugal’s market regulator this morning halted trading in shares in Banco Espirito Santo, which has been under pressure since the accounting irregularities emerged in its holding companies in late May. Those declines escalated today after investors learned that parent company Espirto Santo International had delayed coupon payments relating to some short-term debt securities.

Portugal's PSI 20 index is down about 4 per cent this morning, trading at its lowest level since October and its biggest seven-day drop since August 2011.

The concerns about the fragile economic recovery in Europe are clearly spreading, with indexes in both France and Germany down about 1.7 per cent. There were some disappointing economic reports released in the region this morning as well, with Italy's industrial production unexpectedly falling 1.2 per cent in May, the biggest drop since late 2012, and industrial production in France fell 1.7 per cent, worse than forecast and the largest decline in more than 18 months.

The economic data in Asia overnight weren't market friendly, either. Chinese exports rose by just 7.2 per cent in June from a year earlier, below economists' estimates of 10 per cent. Imports rose 5.5 per cent, against expectations for a 5.8 per cent increase.

The other catalyst for the sell-off has been a refocus on the minutes of the last Federal Reserve policy meeting, released on Wednesday, where officials expressed concerns about the complacency seen among market participants of late. Some officials worried these factors “are an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes said.

The Federal Reserve said explicitly for the first time that it intends to end its extraordinary bond-buying program in October, although markets were already largely factoring in this scenario.

Bloomberg News also released an interview overnight with Federal Reserve Bank of St. Louis President James Bullard, who said the central bank may raise interest rates sooner than investors expect. The interview was conducted on Wednesday, prior to the release of the Fed minutes, with Mr. Bullard saying that a rapid drop in joblessness will fuel inflation, bolstering his case for an interest-rate increase early next year. He predicted inflation of 2.4 per cent at the end of 2015, ahead of the Fed's 2 per cent target.

In a further sign of positive momentum in the U.S. labour market, new jobless claims for last week fell to one of its lowest levels since before the recession that started in 2007, fresh data this morning suggested.

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