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Traders work on the floor of the New York Stock Exchange in morning trading on August 9, 2011 in New York City. (Mario Tama/Getty Images)
Traders work on the floor of the New York Stock Exchange in morning trading on August 9, 2011 in New York City. (Mario Tama/Getty Images)

North American markets surge Add to ...

North American markets surged in volatile trading following a much-awaited statement from the U.S. Federal Reserve Board Tuesday, following a historically bad Monday session.

Bourses in the U.S. and Canada opened trading Tuesday by jumping between 1 and 3 per cent – a welcome change from Monday, when most stocks on the continent, especially financials, were beaten up.

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But most of those gains were wiped away shortly after the Fed released its statement early in the afternoon announcing it would hold short-term interest rates near zero for the next two years. By the close, however, stocks had made up a good portion of Monday's losses.

Even as the Fed's Open Markets Committee said it “now expects a somewhat slower pace of recovery over the coming quarters," it announced no new major stimulus efforts -- something many analysts expected. Nonetheless, the news came as a disappointment to some investors who'd hoped for a more aggressive response, given global declines in stock markets over the past 10 trading days not seen since the depths of the 2008 recession.

"[The Fed is]still betting on a recovery strong enough to gradually bring unemployment rates down, and even there, it might be a bit too optimistic depending on how tough fiscal policy proves to be," said Avery Shenfeld of CIBC World Markets. "Today’s reaction will be to take some of the earlier gains in equities off the table, but we really don’t think the Fed could have done more at this point, ahead of further insights into how the economy is actually faring in the second half."

At the close of trading Tuesday, the Dow Jones Industrial Average the Nasdaq and the S&P 500 were all up around 4 per cent, after huge drops Monday. In Canada, the S&P/TSX Composite was also up 3.7 per cent.

The gains in North America were a vast improvement over Monday, as many overseas bourses slumped for the 10th straight trading day and volatility reigned in Asia and Europe.

Oil ended the Tuesday trading session lower, with traders discouraged after the Fed said the U.S. economy is recovering at a slower pace than it expected. Benchmark crude lost $2.01, or 2.5 per cent, to finish at $79.30 a barrel. That's the lowest it's been since last September.

Earlier in the day, stock markets in Japan and Australia fell about 4.5 per cent in Tuesday trading before clawing back some of those losses. In Hong Kong, shares dropped more than 7 per cent, while South Korea's index tumbled almost 8.5 per cent.

In addition to concerns over European debt and S&P's downgrade of the United States' credit rating, Asian markets were shaken by high inflation data out of China. Data from the world's fastest-growing major economy on Tuesday showed July's consumer price inflation at a three-year high.

After a brief morning rally, European bourses soon followed Asia's lead. By 10 a.m. Tuesday morning in London (5 a.m. Eastern Standard Time), the FTSE 100 was down 3.5 per cent. In Paris, the CAC 40 experienced roughly the same percentage drop. In Frankfurt, the DAX dropped more than 5 per cent in early trading.

“Parallels being drawn with the 2008 financial crisis are starting to look very valid,” wrote David Jones, chief market strategist with IG Index. “October 2008 saw the FTSE drop around 20 per cent in three weeks. By comparison, at its lowest ebb today the index was down more than 15 per cent since the beginning of the month, only nine days ago.”

But in a sign of just how volatile the markets have become, the FTSE 100 ended the day up 1 per cent, while the CAC 40 and the DAX recovered to finish flat. The Australian index dropped as much as 5 per cent before ending the day up about 1 per cent.

“With sentiment seemingly getting worse by the minute, overnight moves can only be characterized as extreme,” wrote RBC Capital Markets senior currency strategist Elsa Lignos.

Hours before Tuesday trading was set to begin in North America, Dow futures showed an expectation of another 1-per-cent drop, while the Nasdaq and S&P 500 were expected to stay flat. However those numbers, too, were subject to volatility – by 7:30 a.m. ET., futures trading indicated the Dow, Nasdaq and S&P 500 were all expected to post about a 1 per cent gain.

Even as the European Central Bank is widely expected to continue intervening in the market, chiefly through the purchase of Italian and Spanish bonds, investors didn’t seem assured. Indeed, some global markets, including the S&P 500 in the U.S., are now approaching a 20 per cent drop from their April and May highs. Generally, such a drop is considered the unofficial marker of a bear market.

“The issue is once again about confidence,” said Craig Alexander, senior vice-president and chief economist with TD Bank Group. “The financial turmoil runs the risk of negatively impacting the psyche of consumers and businesses. If consumers and businesses cut back their spending because of worries about a renewed recession, it can easily result in the precise outcome that they are fretting about.”

U.S. equity markets are coming off a particularly brutal Monday session that saw almost every single stock listed on every major index lose value. The Dow Jones industrial average fell 5.6 per cent – the sixth-biggest point drop in history. The S&P 500 dropped 6.7 per cent, while the Nasdaq lost almost 7 per cent. In Canada, the TSX tumbled more than 7 per cent.

As such, investors continue to flock to traditionally safe investments. After crossing the $1,700 (U.S.) barrier Monday, the price of an ounce of gold hovered around $1750. The Swiss franc, long considered a safe-haven currency, has strengthened against most major currencies and is near all-time highs against the U.S. dollar.

With files from Reuters

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