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Greek debt fears send TSX, Dow, loonie plummeting. But was it a mistake?

OTTAWA - North American stock markets embarked on a brief but dizzying roller-coaster ride Thursday that had all the earmarks of a classic panic selloff in the face of spreading economic turmoil in Greece.

OTTAWA - North American stock markets embarked on a brief but dizzying roller-coaster ride Thursday that had all the earmarks of a classic panic selloff in the face of spreading economic turmoil in Greece.

Trading was down all day, but remained orderly until shortly after 2:30 p.m. EDT, when Wall Street, Bay Street and currency markets all suddenly pitched headlong into a blackout-inducing plunge.

The Dow Jones in New York tumbled 600 points in about six minutes to come close to a 1,000-point loss, the low point of a turbulent day for the world's most important stock market. The index later recovered to a loss of nearly 350 points at the close.

The Toronto Stock Exchange fell more than 450 points — a drop of more than four per cent — before recovering to near break-even.

The Canadian loonie nosedived by more than four cents to fall below 93.02 cents US — the first time it had been that low since early February. It later recovered to close down more than two cents against the American greenback. Other commodity currencies, including the Australian dollar, also got hammered.

Commodity currencies such as the loonie have been in retreat all week as investors flee to traditional safe havens in U.S. treasuries, gold and the yen, but it's been a while since they saw a day as volatile as Thursday.

"This is the kind of day we last saw in 2008," said CIBC chief economist Avery Shenfeld, referring to the beginning of the financial crisis on Wall Street that precipitated a global recession.

"Everybody is trying to stay ahead of the lemmings that are jumping off the cliff."

Almost as quickly as the panic set in, the hysteria vanished. The Dow Jones index recovered half its losses to close down 347.8 points. The Toronto exchange almost returned to where it started the day, down a mere 32.7 points to 11,843, while the dollar finished down 2.09 cents to 95.03 cents US.

Analysts say it's likely that technical computer-generated trading, or human error, was to blame for the sudden dip, although few doubted that markets are skittish and that volatility could return at any time.

There was no major news that would justify the sell-off. Neither the U.S. nor Canada released any significant economic reports, and what was released — building permits in Canada and initial jobless claims in the U.S. — was mildly positive.

The biggest news in Europe was that the Greek parliament had approved stringent austerity measures that clear the way to receiving a $145-billion bailout package. The news prompted protests in the streets, but should have eased the concerns of investors, not added to them.

Some traders said there had been unsubstantiated rumours that the Germany parliament was poised to turn down its part of the Greek aid on Friday, but analysts added that all indications were the relief package would pass.

"Obviously we're dealing with real volatility in the markets, but that was way above and beyond normal. Something unusual was afoot," said BMO chief deputy economist Douglas Porter.

But he added that the fears gripping investors are real and have gone well beyond Greece.

Markets, he said, are now fixating on the growing government debts of most of the industrialized world, including but not exclusively Italy, Ireland, Portugal, Spain, Ireland, the United Kingdom and the U.S., and concerns that the pull-back in spending required to cut debt will derail the global recovery.

"Europe is a major trading partner of ours, and this threatens the entire global growth story," agreed Peter Boockvar, equity strategist at Wall Street's Miller Tabak brokerage.

Lower global growth reduces demand for oil and other commodities, key pillars of the Canadian economy.

Lower growth in Europe is a particular risk for the Toronto stock market, which is heavily weighted in oil stocks and is considered one of the world's premier trading boards for companies that produce primary metals such as nickel and iron.

Finance Minister Jim Flaherty stressed that Canada's fundamentals remain strong.

"I know that the Canadian economy is strong. I know that our fiscal situation is strong. If anyone wants to look at debt-to-GDP ratios or deficit-to-GDP ratios, Canada stands up very well in the world and is certainly not a country that has any fiscal risk," he told reporters after question period.

But Thursday's correction — even without the 20 or so alarming minutes of in mid-afternoon — is injecting new doubts about the cosy growth scenarios championed by the Bank of Canada and most private sector economist.

They have projected that global growth will rise to about four per cent this year, and Canada's economy would expand by between three and 3.7 per cent, and would advance another three per cent in 2011.

Although economists have stressed that uncertainties remain, few have built in the kind of hiccup that Thursday's nervousness suggests is possible.

The optimism was partly based on the better than expected bounce of the last six months, estimated at 5.6 per cent on an annualized basis.

Yet portfolio manager Adrian Mastracci of KCM Wealth Management said markets are worried that much of the early rebound was based on the trillions of dollars governments around the world have poured into economies.

"There's been a lot of stimulus, especially in the U.S., but that stimulus is being taken away now, and the question is what will we do then?" he asked. "The answer is not a good one because the answer is that the economy is not as robust as we think it is."

Porter said one fear is that the nervousness could become a self-fulfilling prophecy that will sap investor and consumer confidence, leading to a pull-back from recovery.

— With a file from Andrew Flynn.

 
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