U.S. and Canadian stock markets closed lower, but well off their weakest levels from this morning, in an unusually active summer session that was highlighted by concerns about the health of Portugal's top-listed bank and the reminder it served of the still troublesome financial state of Western Europe.
The Toronto Stock Exchange’s S&P/TSX composite index was down 100.71 points, or 0.66 per cent, at 15,114.48. All of the 10 main sectors on the index were in the red, led by losses of more than 1 per cent in industrials, energy and materials.
One of the few bright spots was gold miners, which benefit from safe haven gold rising to 3 1/2-month highs amid the market nervousness of this morning. U.S. gold futures for August delivery settled up 1.1 percent at $1,339.20 an ounce.
The Dow Jones industrial average fell 70.54 points or 0.42 per cent, to end at 16,915.07. The S&P 500 lost 8.15 points or 0.41 per cent, to finish at 1,964.68. The Nasdaq Composite dropped 22.83 points or 0.52 per cent, to close unofficially at 4,396.20.
The Canadian dollar was up 0.11 of a cent at 93.92 cents US.
Today's steep sell-off has been blamed on a combination of factors, ranging from concerns about the health of Portugal's top-listed bank to the possibility of the U.S. Federal Reserve hiking interest rates sooner than some expect. There were also unsettling economic reports released out of both Europe and Asia.
None of these factors alone seem to explain the plunge in global equity values earlier today, and seen unlikely to be the trigger point for the long-awaited correction during the multi-year bull market. But with traders increasingly uneasy over lofty stock valuations heading into the second-quarter earnings season, many decided this was the time to take profits.
The selling pressure started overnight in Europe, where the focus turned to fresh concerns about the financial sector health of Portugal, a nation that had only emerged from a three-year international bailout program in May. The biggest banking group in the country, Banco Espirito Santo, has seen accusations that its main holding company covered up a $1.8-billion (U.S.) hole in its accounts. Accounting irregularities emerged in its holding companies in late May, but today, Portugal’s market regulator halted trading in shares in the bank 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 ended down 4.1 per cent and has now suffered its biggest seven-day drop since August 2011.
The woes in the financial sector in Portugal had a significant impact on sentiment elsewhere in Western Europe, where the Germany's Dax index lost 1.5 per cent and France CAC 40 1.3 per cent. There were some disappointing economic reports released in the euro zone today as well, which didn't help matters. Italy's industrial production unexpectedly fell 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.
Another catalyst blamed for the sell-off today: 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.