The “Bear” is back as Canadian stock prices took another hit yesterday losing more value as oil prices hit their lowest level in a year and fears of a looming recession intensified globally. The bear market is the stock trader’s metaphor for sustained investor pessimism.
Greece’s persistent inability to put its debt crisis to rest dragged the Canadian stock market down 3.21% and edged it into official bear market territory at closing dropping 21% from its most recent high. On the 1st day of trading in the 4th quarter the S&P /TSX composite index drop 372 points to 11,251.84. The energy sector fell 5.31% as oil prices fell $1.59 to 2011 lows of US$77.61 a barrel, its lowest close since Sept. 28, 2010. Prices have dropped 15% this year.
Earlier yesterday, European markets fell, dragging Canadian and U.S. stocks down along with them, after Greece said it will miss deficit reduction targets it agreed to as part of an earlier bailout deal.
Many are worried a Greek default would damage the still battered European economy and plunge the world back into recession. That sparked another selloff of oil and mining stocks, since another economic crisis would destroy demand for Canada’s natural resources. The commodity market is really tied to the global economic recovery and so when we see a slowdown globally it impacts Canada.
A recession would lower demand for oil, copper and other resources Canada produces, weakening exports and hurting profits in corporate Canada in turn, hitting share prices negatively as earnings growth has been a key driver for recent price appreciation.
The 2012 draft budget says Greece’s debts are projected to reach 172.7% of gross domestic product in 2012 while the deficit will drop to 6.8%, which is above the 6.5% originally agreed with international bailout creditors. Debt inspectors from the International Monetary Fund, European Central Bank and European Commission, known as the troika, are in Athens reviewing reforms to see if Greece qualifies to receive the next €8-billion installment of its bailout. Without it, Greece will run out of funds in mid-October.
In the United States stocks dropped to a 13-month low as investors sold bank shares on fears that Greece’s worsening financial crisis could cause a large European lender to fail. Investors pegged losses to the sharp fall in Franco-Belgian financial group Dexia, which fell 10% after a Moody’s warning about its liquidity due to concerns about exposure to Greece.
Most investors fear that markets in Europe are going to run well ahead of politicians that are not going to be able to get any kind of reasonable solution. U.S. banks have become a target for speculators. Morgan Stanley closed at its lowest since December 2008. The recession that wiped 12 years of gains off the S&P 500 was caused in part by a credit crisis. In turn, investors fear today that we are going to have a disorderly default in Greece and there could be another banking crisis in Europe as they are undercapitalized and loaded with sovereign debt.
The Dow Jones industrial average dropped 258.08 points, or 2.36%, to 10,655.30, the S&P 500 fell 32.19 points, or 2.85%, to 1,099.23 and the Nasdaq Composite lost 79.57 points, or 3.29%, to 2,335.83. The S&P 500 broke through a previously strong technical support level near 1,120 before hitting a 13-month intraday low just below 1,100.
The benchmark is also down 19.4% from its closing high this year, nearly entering a bear market, which is defined as a 20% decline from its recent high set on April 29th of this year.
A stronger-than-expected reading in a gauge of U.S. manufacturing briefly lifted Wall Street stocks, but global manufacturing shrank for the 1st time in over 2 years in September, reinforcing fears of another recession.
This morning stock index futures fell as European officials considered making banks take bigger losses on Greek debt and on expectations Greece would default soon. Investors fear that the crisis in Europe could make a recession more likely in the United States. To add to market pessimism, Goldman Sachs cut its gross domestic product (GDP) outlook for advanced economies for 2012, seeing growth of 1.3% versus its previous view of 2.1%. “The main driver of our shift in views has been the escalation of bank funding stress in the Euro area, alongside deeper public budget cuts in a number of European countries,” Goldman said in a note.
The STOXX Europe 600 Banking Index dropped 4% this morning while Franco-Belgian bank Dexia dropped a further 14% to a record low in intraday because of its Greek exposure. European stocks dropped 3.4% this morning. Today U.S. banks were likely to remain in focus and continue to be pressured by the same issue.
European finance ministers were considering making banks take bigger losses on Greek debt and delayed a vital aid payment to Athens until mid-November, setting up a crunch point in the region’s sovereign debt crisis. The economy is slowing down, and until there’s a resolution with Greece, that situation will continue to linger over the stock market and the global economy. This could turn into a self-fulfilling recession.
This morning North American futures are pointing down by about 1.0%.
Expect volatility to remain elevated until there is some resolution to Greece and some tangible facts regarding how its default will be contained within the region and within the eurozone.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
