Fears of a global recession set in and sent the Canadian stock market into a downward tailspin after the U.S. central bank delivered a blunt warning about worsening economic prospects. The S&P /TSX composite index tumbled 392.5 points or 3.29% to 11,562.51 after the Federal Reserve warned there are “significant downside risks to the economic outlook.”
The Canadian dollar tumbled 2.08 cents to 97.33 cents US, its lowest level in about a year as the Fed’s warning pushed investors to the perceived safe haven status of U.S. Treasury bonds. Demand concerns sent oil pricing down $5.41 to US$80.51 a barrel and the price of gold, silver and other commodities followed.
In the United States stocks dropped extending a sell-off to 4 days, as policymakers’ failure to stop the global economic stagnation sent markets spiraling downward. Energy and material stocks were among the hardest hit sectors on worries of slowing worldwide demand. Signs of a slowdown in China exacerbate those fears.
The Dow Jones industrial average dropped 391.01 points, or 3.51%, to 10,733.83, the Standard & Poor’s 500 Index lost 37.20 points, or 3.19%, to 1,129.56 and the Nasdaq Composite Index slid 82.52 points, or 3.25%, to 2,455.67.
Weak data from China followed an unsettling outlook about the U.S. economy from the Federal Reserve on Wednesday in stoking recession fears. Wednesday last minute losses were sparked after the Fed said it saw “significant downside risks” facing the economy. China’s once-booming manufacturing sector contracted for a 3rd consecutive month, while the euro zone’s dominant service sector shrank in September for the 1st time in 2 years.
Bank shares were also hard hit with the Fed’s plan to lower long-term rates, compressing margins for banks that borrow at short-term rates and lend at longer-term rates. The declines also came a day after Moody’s cut debt ratings for big lenders. In addition to the statement on Wednesday, the U.S. central bank detailed additional stimulus measures to help push down long-term rates. Investors worried the latest plan would have little effect on lending and that there appeared to be few solutions to sluggish worldwide demand.
This morning stock index futures fell as talk of a Greece default gained pace and a day after markets spiraled downward on deepening worries about global economic stagnation. Greek Finance Minister Evangelos Venizelos was quoted by 2 newspapers as saying an orderly default with a 50% haircut for bondholders was 1 of 3 scenarios for resolving the country’s fiscal woes. European stocks dropped on fears the region’s banks would take more write downs on their Greek debt exposure.
Group of 20 major economies pledged a strong and co-ordinated response to the European debt crisis and weak economic growth in the United States and other countries but that did not help the S&P 500, Dow Jones and Nasdaq 100 futures which are all lower by about 1.0% this morning.
A lot can change within minutes or hours at times like these. I would expect investors to sell into the weekend and then have some policy announcements on the weekend in order to shore things up for next week but it is hard to imagine something other than a organized and controlled Greek default.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
