Andrew Flynn, THE CANADIAN PRESS

Stumble Upon

del.icio.us

Digg

Facebook

Print

Email

Speak Up

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.