Index Daily Change
S&P/TSX composite index 1.36% Drop
Dow Jones industrial average 2.02% Drop
Standard & Poor’s 500 Index 2.38% Drop
Nasdaq Composite Index 2.98% Drop
Canada’s main stock index closed sharply lower yesterday, weighed down by persistent worries about Greece’s aid package that sent investors to the safety of the U.S. dollar which negatively impacted oil prices. The index’s heavily weighted energy sector dropped 2.12% as the price of oil fell 4%, in its steepest loss in 3 months.
The Toronto Stock Exchange’s S&P/TSX composite index did recover a bit from a near 2% fall earlier in the day that had taken the index close to a 2-week low. All 10 sectors were down. Investors were skeptical that European Union officials will not be able to stop Greece’s sovereign debt crisis from spreading to other high-debt euro zone countries, while China’s recent monetary tightening also undermined investor sentiment.
Toronto’s sell-off echoed the wave of worry that gripped financial markets as investors fretted that the crisis in Europe could derail global economic recovery. One gauge of investor fear, the Chicago Board of Options Exchange (CBOE) Volatility Index, jumped more than 18% to 23.84, its highest closing level in almost 3 months.
In the United States stocks also declined on Wall Street, posting its worst daily loss in 3 months on the fear that even with a bailout for Greece, Europe’s debt crisis could spread to other weak Euro zone countries.
Big exporters to Europe including technology and industrial companies dropped including Hewlett-Packard and Caterpillar. Despite the S&P 500’s steep fall, the benchmark did not break major technical support levels except for a short-term bottom on the S&P 500, the intraday low hit last week.
Encouraging U.S. economic data on manufacturing and housing failed to provide a floor to the overall market. Reports showed new orders received by U.S. factories in March unexpectedly increased and pending home sales rose to a 5-month high. On the upside, better-than expected earnings from drug makers Merck & Co Inc. and Pfizer Inc. boosted those shares by 1.5% and 2% respectively. Wal-Mart Stores Inc. was the only other blue-chip to gain.
As mentioned a renewed concern mounted that a record EU/IMF bailout for Greece would not stop a debt crisis spreading in the single currency area. Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed as “complete madness” a market rumor that his country would soon ask for 280 billion Euros in aid from the Euro area. The Euro sank to a 1-year low of beneath $1.31 and the risk premium on Greek, Portuguese and Spanish bonds soared amid jitters about a possible Greek debt restructuring and worries over the fiscal health of other southern European countries.
In Athens, striking public workers challenged Greece’s 110 billion Euro ($146.5 billion) bailout-for-austerity deal, starting a 48-hour national strike that shut down ministries, tax offices, schools, hospitals and public services. There is no faith in what the EU and the IMF have proposed for Greece. In short, investors are betting on a Greek default, as Greece’s own citizens are not going to accept the terms of this rescue, and contagion is a real concern hurting the Euro. Said different, the Citizens of Greece would rather default then accept the terms of the bailout.
News that Greece has appointed debt restructuring specialists Lazard to provide “general financial advice” fueled speculation that some form of orderly rescheduling or payment moratorium may be likely, despite official denials. Finance Minister George Papaconstantinou told Reuters after news of the Lazard hire: “Any form of debt restructuring is out of the question.” Lazard recently advised countries like Argentina, Ecuador and Ivory Coast on sovereign debt restructurings.
The main Greek public sector union, ADEDY, rallied thousands of protesters outside parliament to reject planned wage and pension cuts and demand that the rich foot the bill. Police fired teargas at a small group of protesters who threw rocks and bottles. “We want an end to the freefall of our living standards,” said Spyros Papaspyros, the head of ADEDY, which represents about half a million workers in the Aegean nation of 11 million.
The cost of insuring Portuguese, Spanish and Irish debt against default jumped as contagion worries spread while investors sought a safe haven in U.S. Treasury bonds. Greek bond yield spreads over benchmark German Bunds spiked above 6.00% while Greek bank shares dropped by 10% on the worsening economic outlook. Some argue that the bailout was more a rescue for European banks holding Greek debt than one of ordinary Greek people.
This morning the fear continues as investors fret over which nation might be next as investors are unconvinced that the aid package would stop the crisis from spreading to other vulnerable Euro zone countries like Spain and Portugal. German Chancellor Angela Merkel and the head of the International Monetary Fund warned of financial contagion unless the crisis was stopped in Greece.
The problem is in the timing as it will take time to resolve debt concerns. There will not be an event that calms investors down.
The outlook is not ideal unless collectively all investors are assured that with time the Euro zone can get their act together. Until then expect headwinds from Europe but… corporate profits are strong and we will have further guidance on U.S. employment later today (which will hopefully limit the downside risk for equity investors).
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
