[R-G] Will Canada catch America's economic cold? Stock traders bet it will

[Anthony Fenton]

Will Canada catch America's economic cold? Stock traders bet it will

http://canadianpress.google.com/article/ALeqM5jUJ6uAf_xryhmDyyqKOVjDq5hYbg

TORONTO — The defeat of the U.S. financial bailout bill sent shivers  
of fear through the heart of Canada's financial community Monday,  
prompting already anxious Bay Street traders into a selling frenzy as  
global economic fears multiplied. At one point in afternoon trading,  
the Toronto's S&P/TSX composite index plunged more than 900 points and  
wound up suffering its biggest point drop in history.

"I don't think there's any point in panicking at this point," said  
Scotiabank economist Patricia Mohr, who has been tracking volatile  
trading in financial and commodity markets for a while.

"You just have to hang tough."

Canada's dominant market lost nearly 841 points at the close, shaving  
about $108 billion in value from the Toronto Stock Exchange's main  
index, as investors worried that the battering of the American economy  
will increasingly bleed across the border.

It was the biggest TSX point drop ever, surpassing the 840.3 point  
decline on Oct. 25, 2000.

The Dow Jones Industrials, America's most influential stock  
bellwether, fell 777.7 points, also the biggest daily point decline in  
the Dow's history.

"There's tremendous financial market volatility and also commodity  
price volatility, and it's been that way since about the middle of  
July," added Mohr.

No bailout means no relief for companies stricken by the collapse of  
the U.S. housing market - and President George W. Bush has warned that  
without it, the U.S. economy is headed straight for a recession.

And when prospects for Canada's No. 1 trading partner begin to look  
bleak, it means confidence in this country's fortunes begins to falter.

The Wall Street crisis that has hit the financial sector is also  
starting to spill over into Europe and other parts of the world,  
freezing credit and squeezing jobs and economic growth.

"We're heading towards a global slowdown," warned Adrian Mastracci,  
portfolio manager at KCM Wealth Management in Vancouver, adding that  
more volatile trading lies ahead.

"In my view we've got more bad news to come before we get the better  
news," he said. "We may not get all the bad news at once, we may get a  
little good news - and there may be a bit of a bounce from the depths  
of destruction today. But we'll go back and do it again."

On the campaign trail for the Oct. 14 federal election, Liberal Leader  
Stephane Dion said he was "extremely concerned about the effect  
today's events will have on our economy and the savings of ordinary  
Canadians."

"This crisis illustrates why it is essential to practise sound fiscal  
management in order to be prepared for sudden downturns such as this  
or other unforeseen events that can have a dramatic impact on the  
fundamentals of the Canadian economy," Dion said in a statement.

The Opposition leader said a Liberal government would maintain a $3- 
billion contingency fund in its annual budgets to give government "the  
flexibility and resources to protect Canadians in turbulent economic  
times."

On the stock market, it wasn't just the failure of the bill that  
weighed on the TSX. In a complex interaction of influences, the price  
of oil dropped and the U.S. dollar got stronger against foreign  
currencies.

Oil, one of the major drivers of the Toronto stock market, fell $10.52  
to settle at US$96.36 on the New York Mercantile Exchange - its lowest  
trading level since prices edged back below $100 earlier this month.

"The market is worried that the credit squeeze in the U.S is now  
shifting to Europe and that really heightens concern over the outlook  
for global growth," said Mohr.

"And that's why many of the commodity prices are off... it's not  
because of any particular developments in the oil market or in the  
copper markets or metal markets, it's just this concern about what is  
going on in the financial markets and with reverberations into the  
real side of the economy."

The Monday TSX drop alone will be a significant drag on the  
investments of many Canadians, from stock portfolios to RRSPs and  
mutual funds. But it comes on top of a 25 per cent slide since the TSX  
peaked in June that shows investors were already seriously concerned  
about the health of the economy.

Prime Minister Stephen Harper has said he does not believe Canada is  
in a recession and last week the government reported a four-month  
surplus of $2.9 billion, more than the finance minister budgeted for  
the entire year.

On the positive side, stock markets usually tend to balance out after  
giant swings in either direction, said Mohr.

"The reduction is so great - now hopefully it's going to come back,  
because there are many stocks that are now hugely oversold. I hope  
that in a few months time it's going to right itself and stabilize."

It wasn't just Bay and Wall Streets feeling the sting of the US$700- 
billion plan's rejection in the U.S. House of Representatives - global  
stock markets were wracked with confusion, expressing themselves in  
red numbers.

Japan's Nikkei stock average fell 1.26 per cent. Britain's FTSE 100  
fell 5.30 per cent, Germany's DAX index fell 4.23 per cent, and  
France's CAC-40 fell 5.04 per cent.

Three European governments agreed to inject Fortis NV with a $16.4  
billion bailout. Fortis, with has headquarters in Brussels, Belgium  
and Utrecht, Netherlands, is Belgium's largest retail bank.

The British government, meanwhile, said it is nationalizing mortgage  
lender Bradford & Bingley, which has a $91 billion mortgage and loan  
portfolio. It was the latest sign that the credit crisis has spread  
beyond the U.S.

Looking ahead, economic observers expect the world's major central  
banks, including the U.S. Federal Reserve and the Bank of Canada, to  
take further action, including possible emergency interest rate cuts,  
to stimulate the flowing of credit around the world.

As well, private investors around the world are expected to step up to  
further consolidate the world's financial services sector.

On Monday, Wall Street giant Citigroup Inc. acquired the banking  
operations of Wachovia Corp. in a deal facilitated by the Federal  
Deposit Insurance Corp.