Equity investors around the world are hitting the sell button, as a growing list of worries signals the global economy is slowing down.
Shares in Toronto posted a triple-digit loss of 192 points, or 1.4 per cent, on Monday. Energy stocks led the decline but the slide was broad-based and included the heavily weighted financials and materials sectors. In New York, the Dow Jones industrial average fell 151 points or 1.2 per cent, while many bourses in Europe, including those in France and Germany, had losses of more than 2 per cent.
As concerns grew over the expanding euro-zone debt crisis, the Italian market sagged nearly 4 per cent, for one of the worst drops, while gold, traditionally a haven for skittish investors during market turbulence, rose $10.30 (U.S.) to $1,555 an ounce, just below the record high of $1,565 an ounce set in early May.
"Sovereign debt issues are once again emerging their ugly head," said Kent Engelke, chief economic strategist for Capitol Securities Management, an investment dealer based in Richmond, Va.
"The markets look at Europe and they don't see a way out and that's usually not good for equities," said Benjamin Tal, deputy chief economist at CIBC. He said that with Italy now affected, "clearly you have a recipe for a nervous market."
Analysts said investors fretted over the possibility that the European debt contagion could spread to the U.S. if the country is unable to reach a new debt ceiling by an Aug. 2 deadline. News over the weekend that the pace of inflation in China has picked up also weighed on sentiment because it raised the spectre of further monetary tightening in the world's big engine of growth.
If that weren't enough to unhinge investors, last Friday the U.S. reported lacklustre job gains for June, indicating the economy isn't growing enough to bring down the country's stubbornly high unemployment rate of more than 9 per cent.
"The global expansion is slowing down," observed Adrian Mastracci, president of KCM Wealth Management Inc. in Vancouver, who said investors are "facing what I would call a lacklustre second-half" of the year.
Catalysts for Rebound
To be sure, there are some factors that could trigger a rebound. Most analysts believe that U.S. politicians eventually will agree to raise the debt ceiling, which will allow renewed borrowing by Washington and remove one major uncertainty.
"If the market really thought the odds of default was high, we'd be down 5,000 points right now," Mr. Engelke said. "I do believe we will have some sort of resolution within the next 10 days, 14 days, but it's going to be the proverbial 11th hour."
Another possible catalyst for growth is the start of the second-quarter earnings season. Aluminum producer Alcoa, which unofficially kicks off the season, reported after the market closed that its earnings for the most recent quarter more than doubled, narrowly missing market expectations. Income from continuing operations, excluding one-time items, was 32 cents (U.S.) a share, compared to forecasts of 33 cents.
Market research outfit Capital IQ projected that second-quarter earnings for the S&P 500 will grow 13 per cent. Capital IQ has tracked 26 companies that have already reported second-quarter results and found that 69 per cent have reported earnings better than expectations.
"I believe earnings are going to exceed expectations once again," said Mr. Engelke.
Among the investments that Mr. Engelke favours are shares in mid-sized U.S. banks, a sector he says is ripe for mergers and takeovers.
Not all the news was gloomy for investors Monday. One TSX-listed stock, Peregrine Metals , developer of an Argentine copper-gold deposit, posted one of the year's best single day advances, soaring more than 200 per cent following news of a takeover bid from Stillwater Mining.