A sharp swoon in European markets spilled over into North American trading, with stocks in Toronto closing lower for the first time in six sessions and the Dow Jones Industrial Average posting a triple-digit loss.
The S&P TSX index fell 43 points or 0.37 per cent to 11,623, but the drop was less severe than in New York, where the Dow fell 121 points or nearly 1 per cent to 12,823.
Toronto stocks were aided by a rise in gold shares due to safe-haven buying of the yellow metal, which gained $2.50 (U.S.) to $1,584 an ounce in late session trading. Among senior producers, Kinross and Agnico-Eagle both advanced 0.9 per cent while Goldcorp added 1.4 per cent.
Stocks failed to get a lift from better-than-expected second quarter profits reported by Internet heavyweight Google and industrial conglomerate General Electric, but traded lower because of renewed Spanish debt jitters. Although European ministers formally approved a bank bailout package for Spain on Friday, the region of Valencia requested aid from Madrid to help deal with its debts, underscoring the extent of the country's financial woes.
In response, Spanish stocks tanked by 5.8 per cent, and shares in Italy, another country with debt problems, fell by 4.4 per cent. German and French shares lost about 2 per cent, while London stocks dropped 1.1 per cent.
Despite the gloomy market mood, Google advanced 3 per cent, based on its positive second quarter results. The Internet search engine giant reported a 35-per-cent rise in revenue and 10-per-cent gain in share profit.
GE reported operating earnings rose 12 per cent. The shares, one of the few blue chip advancers, gained 0.4 per cent.
In Toronto, life insurance companies continued to weaken on worries that falling stock prices and lower bond yields will erode their profitability. Manulife Financial fell 1.7 per cent, while Sun Life lost 1 per cent.
Until Friday's decline, stock markets had been having a decent July, recovering some of the losses posted earlier in the year. Equities have been aided by U.S. second-quarter earnings coming in better than expected. Shares have been powered by hopes that slowing growth in the U.S. would encourage the Federal Reserve to run another round of money-printing known as quantitative easing. Also helping was the recovery of commodities from some of their losses this spring.
But some market watchers are urging caution, particularly for the cyclical stocks that depend on an upturn in economic activity to expand their profitability.
Economist Avery Shenfeld at CIBC World Markets told clients in a note Friday that it's "probably not yet" time to embrace the risk on-trade by buying cyclical stocks.
"While we are bulls in waiting, investors in risk on assets don't need to rush in just yet," he said.
One worry is that volumes so far during the summer have been light, so a small amount of demand for stocks in an illiquid market can move prices up a long way. But if sentiment switches to negative, the lack of liquidity might lead to large selloffs.
Mr. Shenfeld says the bar had been lowered for U.S. earnings expectations, so investors have been buoyed that two-thirds of companies have exceeded expectations. "What's concerning is that expectations for the second half of the year have not moved down as sharply, suggesting room for disappointment ahead," he said.
He also warned that investors who hold that bad news is really good news because it will encourage more easing by the Fed might be in for disappointment too.
"That puts far too much weight on the economic benefits of nudging long rates lower still, and ignores the fact that with huge excess reserves already in place, adding more to the pile might not do anything for bank lending," he said.