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Global anxiety takes toll on TSX

VIRGINIA GALT                                                                    Monday, January 21, 2008

Global anxiety about the prospects of a U.S. recession sent stocks prices tumbling around the world Monday, pushing the Toronto Stock Exchange down 604.98 points, or 4.75 per cent – the steepest one-day drop in seven years.

The plunge on the TSX, which closed at 12,132.14, followed sharp drops on the European and Asian stock markets amid investor pessimism over the U.S. government's stimulus plan to prevent a recession – with some stock markets posting their sharpest same-day declines since the terrorist attacks on Sept. 11, 2001.

The U.S. markets were closed for Martin Luther King day Monday, after posting their biggest weekly loss in more than five years last week.

“Without the U.S. markets around to provide leadership, nearly every Canadian share ... offering has traded lower at some point today, which suggests that many investors may be throwing in the towel,” Colin Cieszynski of CMC Markets wrote in his daily market commentary Monday.

Normally, when U.S. markets are closed, Canadian markets tend to trade quietly and finish close to flat, he noted. Not this time.

Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said, “The most disconcerting thing about this steep decline is the fact it happened on a day the U.S. is on holiday because, usually, the U.S. market sets the tone.

“It's just an indication of how downbeat sentiment is around the world now about the U.S. economy in particular and equities more generally,” Mr. Porter said.

Market-watchers are hard-pressed to predict which way the markets will move when Wall Street opens Tuesday, but most tend toward pessimism.

“I think it's a little early yet [for predictions], although it's pretty hard to see what's going to turn sentiment around on a dime at this point,” Mr. Porter said.

Paul Ferley, assistant chief economist at Royal Bank of Canada, said Monday that although U.S. stock markets are closed, “the stock futures market suggests weakness …and that's all spilling into Canadian markets.”

Mr. Ferley said that when the U.S. markets re-open, “We'll get a bit of a deeper market, and that may start stemming some of these declines.

“We'll have to wait and see what happens tomorrow.”

Some analysts said investors were engaging in panic selling, and could not predict when that might abate.

Concerns about the U.S. economy, combined with weakening commodity prices and lower base metal prices, pushed the TSX down.

Craig Wright, chief economist at RBC, told The Canadian Press that financial markets around the globe, and equity markets in particular, “seem to be increasingly pricing in the recession scenario in the U.S.

“Sentiment is so negative right now that anything that could be interpreted as positive news gets ignored and anything that's negative gets exaggerated,” Mr. Wright said.

The losses were felt across the board: In London, the FTSE 100 index plunged 5.48 per cent to close at 5,578.20 points. In Paris, the CAC 40 index lost 6.83 per cent to close at 4,744,45 points and in Frankfurt the DAX shed 7.16 per cent to close at 6,790.19 points, with both markets seeing the biggest single-day losses since the 9/11 terror attacks.

The European markets followed the Asian markets in posting steep declines.

In Asia, India's benchmark stock index tumbled 7.4 per cent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 per cent to 23,818.86 – its biggest percentage drop since the Sept. 11, 2001, terror attacks.

Japan's benchmark Nikkei 225 index slid 3.9 per cent to close at 13,325.94 points, its lowest close in more than two years. China's Shanghai Composite index plunged 5.1 per cent, partly on worries about mainland Chinese banks' exposure to risky U.S. mortgage investments.

Investors dumped shares because they were skeptical that an economic stimulus plan President George W. Bush announced Friday would shore up an economy that has been battered by problems in its housing and credit markets, analysts said. The plan, which requires approval by Congress, calls for about $145-billion (U.S.) worth of tax relief to encourage consumer spending.

“We've taken our lead from the Asian markets who have not been impressed by the U.S. There's debate if there's going to be a recession in the U.S. I don't think there's much chance of that though,” said Richard Hunter an analyst at Hargreaves Lansdown Stockbrokers Ltd. in London.

“It's another horrible day,” said Francis Lun, a general manager at Fulbright Securities in Hong Kong. “Today it's because of disappointment that the U.S. stimulus [package] is too little, too late, and investors feel it won't help the economy recover.”

Investors took cues from the negative reaction to the President's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5 per cent to 12,099.30, bringing its loss for the year so far to nearly 9 per cent.

Traders also have shrugged off assurances from Federal Reserve Board Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively — which means a likely big interest rate cut this month — to help the sagging economy.

“A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take some time for the recovery to reach India because today's fall has been so drastic,” said Jayant Pai, of the Mumbai investment company IL&FS Ltd.

Still, Ms. Pai and others suggested that the declines could proffer a buying opportunity.

“The selloff today takes us close to the bottom,” she said.

Mr. Cieszynski of CMC Markets said, “The lack of liquidity on a U.S. holiday seems to have exacerbated investor fears over the potential for a U.S. recession and a significant market decline.

“It does appear, however, that a panic may be developing, which could set the stage for a significant washout and a potential rebound.”

Richard Hunter of Hargreaves Lansdown noted Monday that investors “aren't buying the U.S. bailout story.”

He added: “The other thing we're seeing today is a lack of buying interest – people are battening down the hatches while they see what happens in the U.S.”

Mr. Porter said: “What I'd like to believe is that what we've seen today is, Toronto [has] already built in the potential for a fairly hefty decline tomorrow in New York.”

However, he added: “I guess the thing I'm concerned about is that the market is so sour right now …that we could come back tomorrow and people are still in a selling mood.”

Gareth Watson, associate director of Canadian equity adviser at Scotia McLeod in Toronto, told The Canadian Press that “we're going to have to see some positive data come out before people regain confidence, and that's really what's missing here, is confidence.”

Mr. Watson added: “Investors just don't have any confidence at all and when we start to get that confidence restored — which could easily take at least another six months, minimum — I don't think people are expecting a sustainable material rally in the marketplace.”

© The Globe and Mail

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