The S&P /TSX composite index fell 254.87 points or 2% yesterday to 11,955.01 responding to the U.S. stock markets. U.S. stocks fell sharply Wednesday after the Federal Reserve moved to lower interest rates on consumer loans with a $400 billion debt-swap program that was widely expected, and noted “significant downside risks” to the economic forecast. Also, a downgrade of several Italian bank ratings by Standard & Poor’s kept alive investor concerns over Europe’s sovereign-debt situation.
The Dow Jones Industrial Average closed down 283.82 points, or 2.5%, at 11,124.84, the blue-chip index lost about 191 points in the last hour of trading. Investors wanted more than they received. Stock investors’ negative reaction came as analysts noted divisions within the central bank, and questioned how much relief its latest move would bring given how much extra money the Fed already has pumped into the economy.
Fed policy makers said they would replace short-term debt in the central bank’s portfolio with longer-term Treasury bonds in a bid to further cut borrowing costs. The central bank, which also kept rates at historic lows near 0%, said that it was acting in view of “significant downside risks to the economic outlook, including strains in global financial markets.”
The bond exchange, dubbed “Operation Twist” by economists after a similar move by the central bank in 1961, bypasses the money creation that fueled a Republican outcry last year. Also, like at the last Federal Open Market Committee meeting in August, three Fed members dissented.
“Stocks fell because equity investors were hoping for action beyond the ‘twist.”
A grim outlook for the U.S. economy from the Federal Reserve and signs of a slowing in China and Germany sent world stocks down further this morning and drove investors into safer currencies and government bonds.
European stocks fell more than 4% to a 2-year low, helping drag global equities to a new 1-year low. North American stocks look set for sharp loss at the opening. Concern was increased on Thursday when HSBC’s China Flash PMI showed the factory sector shrank for the 3rd consecutive month in September, pointing to a slowdown in the world’s 2nd largest economy. Business activity in Germany also grew at its weakest pace in more than 2 years in September and new orders fell for a 3rd month.
World stocks as measured by MSCI were down more than 2.5% to a new year low, making for a more than 14% year-to-date loss. The more volatile emerging markets stock index was down 4.2% for a nearly 22% 2011 loss. In Europe, where questions about the ability of the euro zone to manage some of its countries’ heavy debt remain, stock losses amounted to a fall of over 21% for the year-to-date.
The mood drove investors to seek relative safety. The yield on 30-year German debt sank to a new record low. Yields on 10-year U.S. Treasuries, the target of Fed activity, were down below 1.8%.
Indebted Greece, struggling to avoid default, made new budget-cutting pledges on Wednesday aimed at securing the next slice of bailout funding from international lenders.
This morning it looks like North American stock markets will open down a further 1.5% to 2.0%. Europe needs to get their act together and do something big and creditable, anything less just makes things worse versus better.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
