The Canadian stock index ended sharply lower on Friday as surprisingly strong North American jobs data was overshadowed by downgrades of Spain and Italy’s credit ratings. Downgrades in sovereign debt contribute to investor fears that the global economy will slow and potentially endure another recession.
The index’s resource-heavy materials sector dropped 3%, energy shares dropped 2% and financials were down 1.1% to lead decliners. It was a day of weakness after strong gains in the previous two days which cumulatively added more than 600 points to the index.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 191.71 points, or 1.6%, at 11,588.36.
Early in the day, the index hit its highest level in nearly 2 weeks as data showed U.S. employers hired more workers than expected in September and job gains for the previous 2 months were revised higher, easing recession fears. Canada created 6 times as many jobs than forecast in September, once again outshining the United States.
Specifically, the U.S. economy added 103,000 jobs last month while the jobless rate held steady at 9.1%. The report beat very modest expectations: economists had looked for the U.S. economy to add out about 55,000 jobs. In Canada, economists had expected about 15,000 jobs would be created last month and that the jobless rate would remain unchanged. However, Canada added 61,000 jobs in part because of the return to school which added 38,800 jobs in the education sector.
Further hurting equity markets was the news that 12 British banks have had their credit ratings downgraded by Moody’s Investors Services over doubts about the strength of the government’s support. Within the week stock markets have fallen and risen sharply amid mounting hopes that European policy-makers were preparing a plan to shore up the banking sector in the event of a Greek debt default.
In the United States, after nearly falling into bear-market territory in the middle of the week, U.S. stocks on Friday finished the week higher, building on gains as encouraging jobs data and hopes that Europe is dealing with its debt crisis.
Wall Street’s wild week began with big losses that brought stocks to their worst levels in 13 months. After rebounding Tuesday, the S&P 500 rose about 5% from its worst levels as short-sellers rushed to cover losses on new optimism about Europe. The benchmark index ended with gains of 2.1% for the week.
The U.S. employment data was viewed as being relatively good, but this issue in Europe keeps coming back. U.S. banks led the market volatility within the week as investors fear that large global banks will be negatively impacted by various sovereign debt issues.
The downgrades by Fitch came prior to a European summit on Sunday that was aimed at shoring up the region’s financial sector.
The Dow Jones industrial average was down 20.21 points, or 0.18%, at 11,103.12 and the Standard & Poor’s 500 Index was down 9.51 points, or 0.82%, at 1,155.46 and the Nasdaq Composite Index was down 27.47 points, or 1.10%, at 2,479.35.
For the week, the Dow rose 1.7%, the S&P 500 gained 2.1% and the Nasdaq was up 2.7%.
Within the week European leaders showed more determination to fix problem banks, with the European Central Bank offering more help to struggling banks through the purchase of bonds. Worries about the euro zone debt crisis have hit Wall Street hard in recent months, along with concern about stalling economic growth in the United States and China.
On the weekend the leaders of Germany and France promised Sunday to unveil a new comprehensive package for solving the euro zone’s debt crisis by the end of the month, but offered no details and papered over differences on how to shore up European banks.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said after talks in Berlin their goal was to come up with a sustainable answer for Greece’s woes, agree how to recapitalize banks and present a plan for accelerating economic coordination in the euro zone by a G20 summit in Cannes on November 3rd and 4th of this year.
“We are very conscious that France and Germany have a particular responsibility for stabilizing the euro,” Sarkozy told a joint news conference. “We need to deliver a response that is sustainable and comprehensive. We have decided to provide this response by the end of the month because Europe must solve its problems by the G20 summit in Cannes.”
Sarkozy will host the Cannes summit and is keen to deliver a big success that might bolster his flagging chances of winning re-election in a presidential vote next year. But even if the two leaders can agree on a way forward, the experience of the past two years has shown that they could struggle to get the other 15 countries in the euro zone on board in a timely fashion.
The two euro zone heavyweights have come under pressure worldwide to resolve a crisis which is hurting stock markets. U.S. President Barack Obama, on Thursday, urged Europe to “act fast,” calling the common currency bloc’s crisis the largest obstacle to a recovery in the United States.
Belgian bank Dexia is the 1st bank to fall victim to the 2-year-old euro zone debt crisis, has added a sense of urgency to the talks. The prime ministers of France and Belgium and the finance minister of Luxembourg agreed a rescue plan for Dexia Sunday ahead of the meeting in Berlin. Other French banks have come under intense pressure because of their exposure to Greece and other weak countries on Europe’s southern periphery. BNP Paribas and Societe Generale denied a report Sunday that they could seek to raise a combined 11 billion euros as part of a broader European recapitalization plan.
Greece is expected to run out of cash as soon as mid-November. Inspectors from the European Commission, the IMF and the European Central Bank or the so-called “troika” are currently assessing whether Athens has fulfilled the criteria for more aid.
Yesterday was Thanksgiving holiday in Canada but stocks around the world jumped as much as 3% on Monday, extending gains into a 2nd week as a pledge by German and French leaders boosted hopes that the euro-zone debt crisis may be resolved.
Financials, the most beaten-down stocks during the recent slide, led the rally. The KBW bank index jumped 5.3%. Earnings season is set to begin with Alcoa’s report today after the closing bell and will likely become a driver for stocks in coming weeks.
The Dow Jones industrial average surged 330.06 points, or 2.97%, to end at 11,433.18, the Standard & Poor’s 500 Index climbed 39.43 points, or 3.41%, to 1,194.89 and the Nasdaq Composite Index shot up 86.70 points, or 3.50%, to close at 2,566.05.
This morning North American futures are pointing down by about 0.50% as investors pause and reflect on reality.
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
