Stock markets tumble on worries about strength of economic recovery

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(The Canadian Press)

By Malcolm Morrison, The Canadian Press

TORONTO - Worry over recovery prospects sent the Toronto stock market tumbling Friday as the Canadian economy unexpectedly shrank in August while a drop in U.S. consumer spending raised worries about economic growth being excessively driven by government stimulus measures.

The S&P/TSX composite index close down 164.47 points or 1.49 per cent at 10,910.75, but still above the worst levels of the day which saw the index tumble 308 points at one stage.

Statistics Canada reported gross domestic product shrank 0.1 per cent following a flat showing in July. Economists had expected a 0.1 per cent rise.

The loonie was down 1.29 cents to 92.43 cents US following the report. But the currency was also pulled down by lower commodity prices and a higher U.S. dollar.

The loss followed a 270-point surge Thursday in the wake of news that the American economy grew at an annualized 3.5 per cent pace in the third quarter.

It was the first quarterly growth since early 2008 but there is concern that much of that growth has been fuelled by government stimulus such as the Cash for Clunkers program and a rebate for house buyers.

Concerns over the strength of a rebound sent the TSX down 471.38 points or 4.14 per cent for the week. It was the index's second consecutive weekly loss and the first monthly loss since February. The vast of majority of the decline has come in the last six sessions as the rally that sent the TSX up well over 50 per cent since the lows of early March started to run out of steam.

"It would be fair to anticipate some kind of a pullback," said Steve Uzielli, director, portfolio advisory group at ScotiaMcLeod.

Uzielli noted investors have not been reacting as positively to good news as they had been previously.

"As the market has moved higher and started to price in a fair bit of economic recovery, I think the market got to a position where it was pretty fairly valued," he said. "So to push it higher to the next level, investors need to see the next stage of growth and that ... is going to come from revenue growth, as opposed to just cost cutting."

The Commerce Department said U.S. consumer spending dropped 0.5 per cent in September. Though the decline was in line with forecasts, it was the largest drop in nine months and followed a 1.3 per cent jump in August, which was fuelled by stimulus aimed at cars and houses.

Lower commodity prices weighed on the Toronto market following strong gains in oil and metal prices Thursday.

The December crude contract on the New York Mercantile Exchange lost $2.87 to US$77 after jumping almost US$2.50 Thursday. The energy sector was down 2.47 per cent. Canadian Natural Resources (TSX: CNQ.TO) lost $2.24 to $70.22 and EnCana Corp. (TSX: ECA.TO) dropped $1.83 to $60.

The gold sector lost 1.8 per cent per cent as the December bullion contract on the Nymex lost $6.70 to US$1,040.40 an ounce. Barrick Gold Corp. (TSX: ABX.TO) fell 70 cents to $38.96.

The December copper contract shed 7.4 cents to US$2.96 a pound amid a drop of 1.64 per cent in the base metals sector. Teck Resources (TSX: TCK-B.TO) declined $1.10 to $31.41.

Financials were also a weight, down 1.55 per cent as TD Bank (TSX: TD.TO) moved $1.91 lower to $61.68 and CIBC (TSX: CM.TO) fell $1.16 to $62.

The telecom sector was the only advancer with shares in Canada's three big telecoms - Rogers, (TSX: RCI-B.TO), Bell (TSX: BCE.TO) and Telus (TSX: T.TO) - all ahead after the CRTC ruled Thursday that Toronto-based Globalive isn't Canadian enough to compete as a new national cellphone company. The broadcast regulator said Globalive doesn't meet the Canadian ownership and control requirements to operate as a telecommunications carrier.

Rogers shares gained 77 cents to $31.75, while Telus shares were up $1.14 to $33.99 and BCE advanced 29 cents to $25.89.

The TSX Venture Exchange was 19.01 points lower to 1,291.41.

New York's Dow Jones industrial average lost 249.85 points to 9,712.73, for a loss of 259 points or 2.6 per cent this week and a flat finish for the month.

Adding to unease was the Chicago Board Options Exchange's Volatility Index, which is often used to gauge fear among investors. It surged Friday with the VIX gaining 22 per cent to more than 30, its highest level since July.

The Nasdaq composite index dipped 52.44 points to 2,045.11, while the S&P 500 index dropped 29.93 points to 1,036.18.

Canadian investors had plenty of fresh earnings reports to consider.

Imperial Oil Ltd. (TSX: IMO.TO) reported after Thursday's market close that quarterly profits fell 61 per cent from a year ago, when oil and natural gas prices were much higher. The energy producer and oil refiner earned $547 million or 64 cents a share, above analyst estimates of 58 cents. Its shares were up 47 cents to $40.70.

IGM Financial Inc. (TSX: IGM.TO) reported third-quarter profit dropped to $167.4 million from $198.7 million a year ago as revenues slipped. IGM Financial, a member of the Power Financial group of companies, operates under the Investors Group, Mackenzie Financial and Investment Planning Counsel banners. Its shares were off 64 cents to $38.55.

Tim Hortons Inc. (TSX: THI.TO) shares declined 82 cents to $30.97 as it said Friday its revenue increased to $563.6 million in the third quarter, up 10.7 per cent from a year ago. Despite the sales growth, net income fell to $61.2 million, down 22.3 per cent from a year ago. Tim Hortons said the lower profit was due to $23.1 million in costs associated with reorganizing the company into a Canadian legal entity.