By John Valorzi
03 Oct 2008 at 08:18 AM GMT-04:00

More bad news about the American economy and a Wall Street warning about looming drops in oil, metals and other commodities sparked an 814-point drop on the Toronto stock market Thursday and a plunge in the loonie to its lowest level in nearly a year and a half.

TORONTO (CP) -- Panicked investors fearing a global recession will batter the Canadian resources economy sold off shares of energy and potash companies and materials producers, dragging the TSX to close below 11,000 for the first time since mid-2006.

Thursday's selloff wiped out more than $100 billion in stock value of companies listed on Canada's biggest market and continued a wave of volatility that has beset the market in recent months over fears of a global recession.

"Today's action is a bit stupefying," said Bob Tebbut, with Toronto-based money manager Peregrine Financial.

Some market watchers called Thursday's selloff an overreaction, but they acknowledged that panick has taken hold of some investors — intensifying daily market moves of several hundred points up and down.

On Monday, the Canadian market had its biggest point drop ever after the U.S. House of Representatives rejected a $700 billion bailout plan for insolvent Wall Street banks. The next day the market recovered sharply and has been bouncing all over the place in recent trading.

"It's definitely scaring the pants off everybody," said Vincent Delisle, a strategist with Scotia Capital.

"Big and small, mutual fund managers, retail investors, everybody has a feeling right now that they have to be scared because the markets are very vulnerable and the news flow is horrendous.

"Even in Canada where we really don't have issues with our banking system or financials, credit conditions are tightening and everybody's backing up on projected spending, investments. . . . I don't think many people have seen this intensity of pessimism and uncertainty."

Adding to that uncertainty were several negative economic developments Thursday that triggered the selloff, one of the biggest in TSX history.

First, plunging factory orders and a seven-year high in jobless claims in the United States stoked fears that the U.S. government's rescue plan won't be enough to ward off a serious recession.

Some observers warned that the current slump could be the most painful since the 1981-82 recession that was triggered by interest rates skyrocketing about 20 per cent as central banks fought to tame double-digit inflation.

At that time, the jobless rate rose to about 11% in the United States, nearly twice the current rate, and the economy shed hundreds of thousands of industrial jobs in the steel, auto and other industries.

Also fanning the flames of pessimism Thursday, was a negative outlook on oil, fertilizer, metals and other commodities from Merrill Lynch, the world's largest brokerage.

Merrill analysts warned that crude could fall up to $50 a barrel as the global economy continues to slide.

Merrill also cut its ratings on Canadian fertilizer giant Potash Corp. of Saskatchewan (POT), warning that the Western Canadian company faces lower earnings because of a slowdown in demand from North America and Asia.

About 100 points of the 814 point TSX decline reflected the selloff in PotashCorp., Canada's most valuable company for a time this year, and still one of its most expensive stocks.

Meanwhile, the loonie lost 1.56 cents to close at 92.60 cents US, the Canadian currency's lowest close since May 2007.

Oil company shares on the TSX also fell as the November crude contract on the New York Mercantile Exchange dropped $4.56 to $93.97 a barrel, squeezing the prospects for major energy companies such as Suncor, Petro-Canada and EnCana.

In New York, the Dow Jones industrials skidded nearly 350 points as investors pulled money out of Wall Street, concerned that the bailout plan won't be enough to stimulate growth, loosen up the credit market and dig the struggling economy out of its hole.

Major companies such as IBM, Boeing, General Electric, Caterpillar and American Express — bellwethers of the U.S. economy — all came under selling pressure on the New York Stock Exchange.

The recent economic turmoil has reinforced worries that Canada's resources-based economy will suffer from a worldwide drop in demand for oil, metals, fertilizer and grains.

"The economy is what's driving this weakness," said Subodh Kumar, global investment strategist at Toronto-based Subodh Kumar & Associates. "I think now what's going on is a focus on the economic weakness in a whole bunch of areas."

In the campaign for the Oct. 14 federal election, the economy has become the dominant issue, with opposition parties accusing the Conservative government of mismanaging the economy and refusing to intervene with a more aggressive job creation agenda.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty have repeatedly countered that the economy is fundamentally sound and the financial crisis and housing slump that have battered the U.S. and spilled over into Europe are not affecting Canada.

While growth is slowing, they say, the government's corporate and personal tax cuts have helped companies and consumers deal with the uncertain economic future.

The commodities selloff also whacked the price of gold, as traders moved to buy the strengthening U.S. dollar. Gold for December delivery dropped $43, or 4.8%, to settle at $844.30 an ounce on the New York Mercantile Exchange, after earlier dipping as low as $833.50.

"Commodities are weakening on a stronger dollar and movement of money into other assets," said Tom Pawlicki, commodities analyst with MF Global Research in Chicago.

The worsening U.S. economy has also spilled over into Europe, where France has called an exceptional weekend summit to come up with a common European response to the spreading U.S. financial crisis.

Reports this week have said the French government backs a European bailout plan that could cost up to $422 billion.

On Thursday, France's President Nicholas Sarkozy, who has pledged to protect his country's banks and depositors, sought to quell fears at home about a credit crunch by announcing a $30.6 billion loan deal for small businesses.

"We need a global effort to inject confidence in the financial markets and the United States, of course, have a major responsibility," European Commission President Jose Manuel Barroso said Thursday.

© The Canadian Press