Stocks went into a tailspin Thursday, in a broad, vicious selloff that began Wednesday with the Federal Reserve outlining its plans to wind down its stimulus program later this year. It was the heaviest day of trading this year on Wall Street.
The S&P/TSX composite index tumbled 299.71 points or 2.44 per cent to 11,968.57, leaving the TSX down 465 points or 3.75 per cent so far this year. The loonie dropped 0.94 of a cent to 96.4 cents US.
New York’s Dow industrials plummeted 353.87 points to 14,758.32 after dropping 206 points Wednesday. The Nasdaq fell 78.57 points to 3,364.63.
And the S&P 500 index lost 40.74 points to 1,588.19. It was the benchmark U.S. index's worst day since November 2011, and it has now fallen about 4 per cent from its all-time closing high on May 21. Some 94 per cent of stocks traded on the New York Stock Exchange were down for the day.
“We thought there would be a correction somewhere. This probably is it. We’ve been looking for a correction since April,” said Bruce Bittles, chief investment strategist at brokerage and research firm Robert W. Baird & Co in Sarasota, Florida.
The carnage was particularly severe in the materials sector, as commodities saw their biggest decline in a year and a half. Gold fell nearly 7 per cent and silver more than 9 per cent, as the U.S. dollar spiked against major currencies. Industrial metals such as copper also took their own bruising, with sentiment undermined by weak manufacturing numbers out of China and a tightening in the nation's credit conditions. Oil closed down more than 3 per cent.
Income-producing securities, such as real estate investment trusts and utilities, were also hard hit, as a further surge in long-term bond yields made their payouts less attractive in comparison. The 10-year U.S. Treasury yield rose as high as 2.44 per cent, up more than one-tenth of a percentage point.
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 (U.S.) 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.
The Fed’s program of bond-buying has fueled stock market gains this year, sending indexes to a series of all-time highs. A trend emerged of investors buying on market dips and limiting stocks’ decline.
David Joy, chief market strategist at Ameriprise Financial in Boston, said it wasn’t clear that pattern would continue.
“There’s money leaving the market from people who were convinced that the rally has been mostly attributable to the Fed, and the rise on the 10-year yield is a concern since it happened so quickly,” he said. “It’s too early to say whether this represents a buying opportunity or if the weakness will continue.”
There's also reason to be encouraged by the Fed's words on Wednesday, despite the very negative reaction at trading desks worldwide.
“Remember that tapering would be a vote of confidence in the market, which would be good news,” said Joy, who helps oversee $708 billion in assets. “And for the moment, the Fed is still very accommodative, with things remaining data-dependent. Those are signs that declines of this magnitude may not be justified.”
Markets didn't get welcome news on the data front in the morning, either, as it continued to point to less need for economic stimulus. U.S. jobless claims rose a greater-than-expected 18,000 to 354,000 last week. Economists' forecasts for the report was for 340,000 new claims.
U.S. home resales jumped to their highest level in 3-1/2 years in May and factory activity in the U.S. mid-Atlantic region rebounded in June to its highest level in more than two years.
Credit markets, meanwhile, were also extremely active. U.S. investment-grade bonds were crushed in secondary trading, while China’s overnight repo rate - the interest rate for interbank lending that keeps markets liquid - spiked to 25 per cent. The level was reminiscent of the credit market freeze just before the collapse of Lehman Brothers, the nadir of the financial crisis in September 2008.
The benchmark U.S. 10-year Treasury was down from early highs but still at 2.42 per cent late Thursday afternoon, up sharply from 2.25 per cent before the Fed’s announcement Wednesday afternoon. The yield had been as low as 1.6 per cent at the beginning of May.
Gold fell $87.80 to $1,286.20 (U.S.) an ounce, putting it below $1,300 for the first time in nearly three years. On the TSX, Goldcorp Inc. faded $2.12 to C$24.81 while Barrick Gold Corp. declined $1.45 to $17.10.
The July crude contract fell $2.84 to $95.40 (U.S.) a barrel, pushing the energy sector down 2.3 per cent. Suncor Energy gave back 68 cents to C$30.83.
The utilities sector gave back 4.74 per cent while TransAlta Corp. declined 48 cents to $12.91.
The telecom sector shed 2.27 per cent and BCE Inc. was down 97 cents to $43.15.
Bank stocks also contributed to the dismal showing on the TSX with Royal Bank down $1.77 to $58.92.
With files from the Canadian Press and Reuters