The Canadian stock market dropped another day with another steep decline on Friday, the 3rd in a string of sell-offs. Investors have fled the vulnerability of stocks as the world wrestles with the real possibility of another recession.
The key story on Friday was the steep decline in gold prices and precious metals which helped push the S&P /TSX composite index 99.65 points lower or about 0.88% to 11,462.87, leaving the main index 20% below its highs of early March and is officially in what analysts call a “bear” market.
The S&P/TSX ended the week down 925 points or 7.46% for the week, leaving the key index at its lowest level since July of 2010. There are worries that losses could get worse. Predictions about flagging growth in the world’s largest economy and the possibility of a painful outcome to the European debt crisis have spooked many into seeking a safe haven for their money.
The simple reality is that we have a potentially bigger crisis mounting because governments, which bailed out stocks in the past, are now insolvent and broke. The drop in stock markets was sparked initially by a warning from the U.S. Federal Reserve that the U.S. economy faces sizable downside risks, which added to uncertainty that Europe’s fiscal crisis would be contained.
In turn, investors were not assured by a pledge to stabilize markets from the world’s leading economies. Finance ministers from the G20 countries meeting in Washington vowed Thursday to “take all necessary actions to preserve the stability of the banking systems and financial markets” and to make sure banks have the cash they need to pay their day-to-day expenses.
The Moodys bond rating agency downgraded 8 Greek banks Friday due to their exposure to Greek government bonds and the deteriorating economic situation in the country.
Greece has been kept solvent by a euro 110 billion bailout in 2010 from other eurozone countries and the International Monetary Fund. But it has needed another massive bailout this summer, and has angered international creditors by lagging behind in its commitments to implementing reforms and carrying out pledges. European officials have begun to speak openly of the possibility of a Greek default, and the fears have further “hit” global stock markets and economic prospects.
On Friday the gold sector was the hardest hit, down about 5.0% as the December bullion contract on the New York Mercantile Exchange fell $101.90 to US$1,639.80, for a loss of 9.6% for the week, despite the precious metal’s reputation as a safe haven amongst chaos. Analysts point out that gold also got caught up in the intense volatility on stock markets this week.
Investors are concerned that a slowing global economic slowdown will push commodity prices sharply lower as oil price fell US$81 a barrel mark.
In the United States the Dow Jones industrial average on Friday suffered its worst week since the depths of the financial crisis in 2008, stung by anxiety over Europe’s spiraling debt crisis and a warning from the Federal Reserve about the U.S. economy. This went downhill quickly on Wednesday after the Fed announced it would trade out about $400 billion in short-term Treasury’s for ones with longer-term maturities. The bond-exchange program termed “Operation Twist” is aimed at lowering long-term consumer borrowing costs. But analysts noted that it’s more limited than some of the Fed’s past stimulus programs and may only help the lagging U.S. economy at the margins. At least stocks ended higher after a disastrous 4 days of selling by the end of the week, which helped push down the S&P 500 index 6.6% for the week.
Fears of a Greek default and the Federal Reserve’s gloomy prognosis for the U.S. economy precipitated heavy selling in equities. Stocks see-sawed between gains and losses on Friday, but the S&P was able to hold above the August 8th low of 1,119, a key support level that served as a trigger for buyers during the week.
While the market remains susceptible to further losses, many traders believe it will take a significant deterioration, either in the economy or in Europe, to spur another sharp decline.
For the week, the Dow dropped 6.4% for its worst weekly performance since October 2008 and the Nasdaq lost almost 5.3%. The primary trigger for the rebound late in the week came from policymakers suggesting additional steps will be taken to support Europe’s financial system (by having the European Central Bank add more liquidity into the banking system.)
The Dow Jones industrial average gained 37.19 points, or 0.35%, to 10,771.02, the Standard & Poor’s 500 Index gained 6.83 points, or 0.60%, to 1,136.39 and the Nasdaq Composite Index gained 27.56 points, or 1.12%, to 2,483.23.
The escalating turmoil in global markets has led many analysts to cut their year-end targets for the benchmark S&P 500 index, with even some of the most bullish investors beginning to scale back their optimism a bit.
It is clear that stock investors are very much “sick and tired” of the authorities in Europe and in the U.S. twiddling their thumbs and not doing substantive things to solve this crisis of the global economy, the odds of a double dip recession on a global basis are increasing rapidly.
It is clear that European policymakers are quickening their preparations to cope with an escalation of the region’s debt crisis as talk of a possible Greek default gained pace. Finance officials from around the world have turned up the heat on Europe to do more to prevent Greece’s debt crisis from infecting other euro zone countries and the world economy.
Concern now appeared to be turning toward safeguarding the banking system more than rescuing Greece, as international lenders were increasingly losing patience with Athens consistently missing fiscal and reform targets.
Euro zone leaders need to have the situation under control by the time leaders of the Group of 20 economies meet in France in November.
Pressure is growing on European governments for a recapitalization of the region’s banks to strengthen them in the event of a Greek default. At the same time, European policy-makers seemed to be warming to the idea of giving more muscle to their bailout fund which would be tested in the event of a Greek debt default. Finance Minister Evangelos Venizelos was quoted by 2 newspapers as saying an orderly default with a 50% haircut for bondholders was one way to resolve the heavily indebted euro zone nation’s cash crunch.
Greece is in tense talks with the International Monetary Fund and European authorities, known as the “troika”, to secure a new 8 billion-euro installment of its rescue package to avoid bankruptcy in October in return for austerity measures.
The growing talk of a Greek default met with stiff opposition from Germany’s Chancellor Angela Merkel. She told a meeting of her political party members that was not an option for her because it might trigger a domino effect in other struggling economies. “The damage would be impossible to predict,” Merkel warned.
G20 finance ministers and central bankers had pledged on Thursday to “take all necessary actions to preserve the stability of the banking system and financial markets as required,” a statement that failed to calm investors.
Canadian financial policy-makers ended 2 days of meetings Saturday expressing some confidence “that European authorities have been seized with the urgency of resolving their sovereign debt crisis.” Bank of Canada governor Mark Carney said he was “somewhat encouraged” by the stance of European officials at the Washington meetings. “There’s some progress, but I repeat in the end it’s about actions. Actions will have to be taken in a timely manner.”
Carney made it clear that Europe’s debt woes extend beyond Greece, a reference to debt overhangs that Ireland, Portugal, Spain and Italy also face. And he stressed “that if those issues aren’t resolved and quickly, the ensuing whirlwind hitting the global economy would be difficult to corral”. Canada has sound fundamentals but Canada would still feel its aftershock.
Finance Minister Jim Flaherty, along with his U.S. counterpart and others here, have stressed the need to impress markets with their resolve by urging eurozone leaders to “overwhelm the problem” with a massive bailout fund, as the U.S. did in 2008 in passing the near US$750-billion rescue package known as TARP. “They need to overwhelm the problem in order to get ahead of the markets,” Flaherty said Friday night. “The sooner the better, uncertainty and delay are the enemies.” On Saturday, U.S. Treasury Secretary Timothy Geithner also urged European leaders to work with the European Central Bank to enhance the eurozone’s emergency bailout fund, but gave no specific number.
Carney and Flaherty said they did not expect a recession in Canada, but admitted growth is already much slower than predicted earlier in the year, prospects going ahead are dimmer, and the risks are greatly elevated.
Not much has changed this morning but stock index futures rose by about 1% on hopes European policymakers were putting together new measures to help ease the region’s debt crisis, but the lack of clarity on their potential effectiveness was seen keeping markets volatile.
A move by European leaders to strengthen the European Financial Stability Facility bailout fund as well as reports of a possible repurchase of covered bonds by the European Central Bank lifted investor sentiment.
Valuations or fundamentals for corporate profits remain attractive but the headline overhand will keep investors on edge.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
