Michael Babad

Globe and Mail Update

07:49 EDT Friday, August 05, 2011

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Markets sink

As one trader puts it this morning, the weekend can't come soon enough.

Global stock markets picked up today where they left off yesterday, in an ugly mood driven by fears of a stalled recovery and a spreading debt crisis in the embattled euro zone.

"Global markets have experienced heavy losses this morning after the Dow experienced its worst session since December 2008," said IG Index sales trader Will Hedden.

"Asian investors have abandoned equities in favour of cash markets while in London the FTSE 100 is deeply in the red, having haemorrhaged over 100 points on open. The combination of the euro zone crisis spreading, poor domestic growth figures and the threat of a double-dip recession in the U.S. has now created a perfect storm and traders are hitting the panic button."

Tokyo's benchmark Nikkei plunged 3.7 per cent, and Hong Kong's Hang Seng 4.3 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were down by between 0.7 per cent and 2.1 per cent by about 6:45 a.m. ET.

Dow Jones industrial average and S&P 500 also dropped.

"Risk aversion continued overnight with S&P 500 futures pointing to a modestly weaker open following yesterday’s carnage," said Sal Guatieri of BMO Nesbitt Burns.

"Commodity prices remain soft, with oil at $86 a barrel," he added in a research note. "... However, Treasuries are also weaker (with the 10-year yield up 3 basis points to 2.43 per cent) on profit taking following yesterday’s massive rally. On the plus side, Italian and Spanish credit spreads narrowed, with the latter’s 10-year rate dipping below 6 per cent."

The fate of the North American markets will be dictated by a U.S. jobs report at 8:30 a.m. ET, when a weak showing could drive markets deeper or good numbers could spark a rally.

While many investors now fear a double-dip, many economists do not. And it's important to keep front and centre their projections for economic growth, albeit slow.

"In the U.S. today’s July employment report in unlikely to lift the mood much given the data we’ve seen this week with expectations of gains of 85,000, up from June’s horrible 18,000," said CMC Markets analyst Michael Hewson.

"With sentiment as depressed as it is it would take an almighty beat to shake the market out of its fear, while a miss on the downside could well open up further risk aversion."

So far this weeks, world stocks have lost about $2.5-trillion (U.S.).

"The 3.4-per-cent slide in the TSX yesterday leaves the index a hefty 13.2 per cent below its early April closing high, and at its lowest level since last October," said BMO Nesbitt Burns deputy chief economist Douglas Porter.

"The Dow is down 11 per cent from its recent high. There was no place to hide yesterday, as all 10 sectors were in the red ... The Toronto index has now shed 1,000 points just since the start of last week ... Imagine if Washington had been unable to come to a deal."

As the Globe and Mail's Brian Milner, Rita Trichur, Richard Blackwell and Brenda Bouw report today, investors fear not only that the global recovery has run out of steam, but that there's little governments and central bankers can do about it.

Indeed, the debt crisis in the euro zone has run for well over a year now, and policy makers have failed repeatedly to get a grip on it amid divisions in the monetary union and what appears to be a policy vacuum. And while the European Central Bank held rates steady yesterday after raising them earlier, some observers warn its focus on inflation is only making matters worse.

The leaders of Germany, France and Spain were scheduled to talk today to discuss the market plunge.

"The ECB’s fixation on inflation targeting has helped precipitate the very crisis they should be looking to avoid as investors see growth slowing and debt rising," said Mr. Hewson.

"With Europe’s leaders on holiday and no chance of the [bailout fund] getting the powers it needs in time to avert a meltdown, the ECB could well be forced into cutting rates and printing money to free up liquidity to prevent another freezing up in the credit markets."

• Global stocks tumble as recession fears grow
• Market snapshot: What's happening now
• Fears plunge stocks into freefall for heart-stopping one-day drop
• The cost so far: $2.5-trillion wiped off world stocks
• Euro zone leaders to hold crisis talks
• Currency markets take up arms

Jobs market slows

Canada's labour market is slowing, creating just 7,100 new positions in July. And while the unemployment rate is now down to 7.2 per cent, its lowest since 2008, that's because some people have given up looking for work and have left the work force.

Gains in full-time jobs offset the losses in part-time employment. And, on an optimistic note, the private sector created 95,000 positions. However, the public sector lost 72,000 jobs, which mean private corporations are doing all the heavy lifting. And while many observers stress the gain in private sector work, the cutbacks in the public sector shouldn't be ignored, particularly for what they mean going forward in this era of austerity.

Canada's labour market has rebounded from the depths of the recession at a far faster pace than in other countries. In the past year alone, for example, some 252,000 jobs have been created. Still, the jobless rate is forecast to remain above the 7-per-cent mark for some time yet.

The private sector has now added more than 240,000 jobs in the past 12 months. That's a gain of 2.2 per cent, compared to a rise of just 0.9 per cent for the public sector.

Of concern, said Karen Cordes Woods and Derek Holt of Scotia Capital, is the slowdown in wage growth in July to just 1.4 per cent, which is negative after factoring in inflation.

"Forget small month-to-month changes in the jobs tally compared to 17.3 million employed individuals," they said.

"What matters is that on average, the Canadian worker isn’t keeping his head above water as she pays more for basic staples like gasoline and groceries over time. That is a bearish guide for consumption just as it has been on disappointing consumption figures throughout 2011."

• Canada's economy creates few jobs in July

Magna profit slips

Canada's Magna International Inc. posted a dip in second-quarter results, although it sales surged.

The continent's biggest auto parts producer earned $282-million (U.S.) or $1.15 a share in the quarter, compared to $294-million or $1.30 a year earlier. Sales, though, climbed almost 25 per cent to $7.3-billion.

Among other reasons, the parts giant cited higher input costs for its sliding profit.

"Operational inefficiencies and other costs, in particular at our exteriors and interiors systems business in Europe, higher commodity costs, new facility costs incurred to support our growth around the world, as well as the favourable settlement of certain commercial items during the second quarter of 2010 were the primary factors behind the decrease, more than offsetting the operating income earned on the increased sales in the second quarter of 2011 combined with the net positive impact from the unusual items in the second quarters of 2010 and 2011," it said.

• Magna profit slips in second quarter