The Canadian stock market closed down nearly 300 points Friday as investors worried over weaker than expected Canadian jobs figures, a U.S. employment plan and the sudden resignation of a European Union official. The S&P /TSX composite index lost 296.4 points or more than 2% to 12,387.54. That erased the index’s earlier gains and left the stock market down 1.7% for the week.
Statistics Canada data showed the economy shed jobs in August for the 1st time in 5 months. That pushed the Canadian unemployment rate up by 1/10th of 1.0% to 7.3%. Canada’s loss of employment was small in August at 5,500 but it was the 2nd consecutive month that jobs growth was flat in Canada, a clear signal that the economy continues to struggle. Economists had expected a 25,000 job gain. There was also more Canadian data released Friday morning that suggested a slowdown in the economy.
The Canada Mortgage and Housing Corp (CHMC) says the pace of home construction slowed last month to a seasonally adjusted annual rate of 184,700 units down from 204,500 in July.
Investors appeared unmoved by President Obama’s announcement of a $447-billion plan for jobs creation announced on Thursday and stock markets dropped further after a top European Central Bank official unexpectedly resigned. The European Central Bank (ECB) said Juergen Stark, part of the 6-member governing board, was quitting for personal reasons. Juergen Stark has been a consistent critic of the ECB’s program to purchase government bonds in the markets.
The Group of Seven (G-7) economies of the U.S., Canada, Japan, the U.K., France, Italy and Germany are all facing a similar challenge. The economic recovery that began a little over a year ago is already running out of steam but governments’ ability to boost growth is hampered after the financial crisis pushed up their deficits and corresponding debt and interest rates are at historic lows.
In the United States stocks tumbled more than 2% on Friday after the top German official at the European Central Bank resigned in protest of the bank’s bond-buying program, which has been a major tool in fighting the region’s debt crisis.
Investors’ rising fears were highlighted by a 12% jump in the market’s main measure of expected volatility, the Chicago Board of Options Exchange (CBOE) VIX volatility index. The VIX almost hit 40, close to its highest level this year, as it marked its biggest jump in 3 weeks. Juergen Stark’s resignation is suggesting that there is a lot of pressure (stress) being built in the senior levels in the ECB. In short, there is an increasing realization that this is a major solvency issue in the banking system.
Doubts about President Barack Obama’s $447 billion stimulus proposal added to the negative sentiment, with investors unconvinced his administration has the tools to revive the fragile U.S. economy.
The sell-off was broad with all 10 S&P sectors in the red and more than 80% of stocks listed on the New York Stock Exchange falling. There is an extreme amount of negativity amongst investors.
The Dow Jones industrial average dropped 303.68 points, or 2.69%, to 10,992.13, the Standard & Poor’s 500 Index dropped 31.67 points, or 2.67%, to 1,154.23 and the Nasdaq Composite Index dropped 61.15 points, or 2.42%, to 2,467.99. The S&P 500 ended the week down 1.7% lower and is now down 8.2% for the year. The yield on the 10-year Treasury note hit its lowest level in 50 years.
The ECB has been buying up sovereign bonds to help hold down borrowing costs in some debt-strapped euro zone members, and the program has been considered critical to avoiding market contagion. The resignation of Stark may exacerbate the fragile relationship between the ECB and Germany.
U.S. Treasury Secretary Timothy Geithner on Friday pressed Europe’s strongest economies to give “unequivocal” financial support to weaker euro zone countries to overcome a debt crisis that threatens the world economy.
This morning global stock markets fell sharply amid continued anxiety over Europe’s debt problems and a potential default by Greece that would wreak havoc on the global economy. The Japanese stock market hit a 28-month low.
Investors sold stocks amid concern that Greece’s problems would spread across Europe, and headed for safer havens like bonds.
European shares fell with Britain’s FTSE 100 down 2.2%, Germany’s DAX falling 3% and France’s CAC-40 dropping 4.5%. Wall Street is also preparing for a drop, with Dow Jones industrial futures down 1.5% and the S&P 500 falling the same.
Greece basically has its back against the wall and it will default but the bigger issue is who will follow. Debt-crippled Greece urgently needs to keep a program of cutbacks on track to secure the continued flow of international rescue loans worth €219 billion ($302.6 billion) protecting it from bankruptcy.
Recent talks among the G-7 finance ministers and central bank governors, ignored calls for a stronger unified response to Europe’s debt crisis. They instead insisted that each country should tread its own path back to growth amid concerns of a global slowdown. In short the unified bailout is starting to lose traction. The key will be ensuring that there is some orderly restructuring Greece sovereign debt but until there is visibility investors will sell first and ask questions later.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
