TSX tumbles 300 points: Fed sees slower bond buys, Chinese manufacturing slips

TORONTO – The Toronto stock market headed deeper into the red for a second day Thursday after the U.S. central bank signalled that investors will have to get used to less economic stimulus and ultimately higher interest rates.

The S&P/TSX composite index ended its worst single-day sell-off since April 15 by closing down 299.71 points or 2.44 per cent at 11,968.57. That left the TSX down 465 points or 3.75 per cent so far this year.

The slide cut across all sectors as the TSX was also caught up in headwinds resulting from a disappointing read on Chinese manufacturing, which sent prices for oil and copper tumbling.

The greatest damage to market sentiment came from the Fed after chairman Ben Bernanke signalled an end to the central bank’s US$85 billion of bond purchases each month, likely slowing later this year and ending in 2014. The timing depends on economic data.

The Canadian dollar also got caught up in the volatility, tumbling 0.94 of a cent to 96.4 cents US.

New York’s Dow industrials and the S&P 500 posted their biggest losses of the year. The Dow plummeted 353.87 points to 14,758.32 after dropping 206 points Wednesday, while the Nasdaq fell 78.57 points to 3,364.63 and the S&P 500 index lost 40.74 points to 1,588.19.

The Fed has been buying bonds as a way of keeping long-term interest rates low in the hope of boosting borrowing and spending. But the inflow of cash into financial markets has also helped fuel a boom on many world markets, including New York where the Dow industrials had been up more than 16 per cent on the year.

That rally, which extended to Europe and Japan, left Toronto in the dust, in large part because the TSX is so heavily weighted in favour of resource stocks that have suffered because of a sluggish global recovery.

Analysts say that investors weren’t expecting Bernanke to say the program could end so quickly, and are now having to adjust their holdings to anticipate higher U.S. interest rates.

Some analysts wondered why markets viewed this as such a negative since higher rates should mean the economy is doing better.

“We have got away with murder recently with the low interest rates,” said Ron Meisels, president of Phases & Cycles Inc. in Montreal.

“People are naive not to think that interest rates are going to eventually have to move up, which means together that bond prices are coming down (and yields going up). Is it going to happen today? No.”

Thursday’s market slide was the latest instance of volatility that started May 22 when Bernanke first mentioned that the U.S. central bank could be ready to start tapering its bond purchases.

Indications of such a slowdown of bond purchases have also had the effect of sending bond yields higher. That is because prices would be impacted by the Fed not buying as many bonds. When bond prices are depressed, the yield moves higher.

The benchmark U.S. 10-year Treasury was down from early highs but still at 2.42 per cent late Thursday afternoon, up sharply from 2.25 per cent before the Fed’s announcement Wednesday afternoon. The yield had been as low as 1.6 per cent at the beginning of May.

Those rising yields have caused big problems for another part of the market — interest rate sensitive stocks on the TSX such as utilities, telecoms, REITs and pipelines.

“When bond yields are going down and dividend yields are staying constant or going up, it makes interest sensitive stocks more appealing,” explained Gareth Watson, vice-president Investment Management and Research at Richardson GMP Ltd.

“When rates start to go higher, then all of a sudden bonds can offer a better return on a relative basis . . the gap on returns between bonds and equities starts to narrow. So in other words, the equities become less attractive.”

For example, the utilities sector is down almost 12 per cent this month while telcos have fallen about seven per cent.

Resource stocks have also taken a beating on the TSX, reflecting lower commodity prices and sluggish global growth, with the base metals sector is down 16 per cent this month and 30 per cent year to date.

Those stocks fell steeply Thursday after HSBC said that the preliminary version of its monthly purchasing managers index for China fell to a nine-month low of 48.3 in June, down from 49.6 in May. Numbers below 50 indicate a contraction in the manufacturing sector.

Commodities slid as a result of demand concerns following the disappointing Chinese data and the higher U.S. dollar.

A higher U.S. dollar pressures commodities because a stronger greenback makes it more expensive for holders of other currencies to buy oil and metals, which are dollar-denominated.

The price of copper on the New York Mercantile Exchange lost eight cents to US$3.06 a pound, leaving the base metals sector down almost five per cent.

Gold has also suffered mightily, with the TSX global gold sector down more than 40 per cent year to date after dropping more than seven per cent Thursday.

Gold stocks have already had a tough time as the bottom line of miners has been under pressure from rising costs to get the ore out of the ground.

On top of that, bullion prices have been slammed. Aggressive monetary stimulus programs by central banks have supported gold prices since the 2008 financial crisis and subsequent recession, partly because of worries about inflation. But prices have eroded as inflation remains tame and the global economic outlook continues to improve.

On Thursday, gold fell $87.80 to US$1,286.20 an ounce, putting it below $1,300 for the first time in nearly three years. Goldcorp Inc. (TSX:G) faded $2.12 to C$24.81 while Barrick Gold Corp. (TSX:ABX) declined $1.45 to $17.10.

The July crude contract fell $2.84 to US$95.40 a barrel, pushing the energy sector down 2.3 per cent. Suncor Energy (TSX:SU) gave back 68 cents to C$30.83.

The utilities sector gave back 4.74 per cent while TransAlta Corp. (TSXL:TA) declined 48 cents to $12.91.

The telecom sector shed 2.27 per cent and BCE Inc. (TSX:BCE) was down 97 cents to $43.15.

Bank stocks also contributed to the dismal showing on the TSX with Royal Bank (TSX:RY) down $1.77 to $58.92.