Stocks slump on European downgrade worries

The Canadian dollar lost ground as investors avoided risk and bought into U.S. Treasuries. The loonie fell 0.71 of a cent to 97.48 cents US.

U.S. markets also closed off the worst levels of the day as the Dow industrials fell 162.87 points to 12,021.39. The Nasdaq lost 34.59 points to 2,612.26 while the S&P 500 index was down 18.72 points to 1,236.47

Markets had reacted positively on Friday after most European Union countries agreed to frame a new treaty that would see a central authority overseeing their budgets and impose tighter controls on spending. This would be backed up by automatic penalties if countries spend too much. But traders were concerned that the deal doesn’t do enough to support financial markets in the short-term.

On Monday, Fitch Ratings said that the deal made little difference. Fitch predicted that the region would face “a significant economic downturn” as it wrestles with the sovereign debt crisis, which may last “throughout 2012 and probably beyond.”

The verdict on the summit from credit rating agency Moody’s was equally negative.

“The announced measures therefore do not change Moody’s previously expressed view that the crisis is in a critical and volatile stage,” Moody’s said, warning that it still intends to review all EU governments’ ratings for possible downgrades during the first three months of 2012.

Prior to last week’s summit, Standard and Poor’s said it was placing the EU’s AAA long-term rating on credit watch negative. Earlier in the week, the agency had put a large number of the 17 euro countries on notice for a possible downgrade, including Germany and France.

There was disappointment that the deal didn’t include a move by the European Central Bank to ratchet up buying bonds of deeply-indebted countries such as Italy and Spain in order to keep a lid on borrowing costs.

“The hope was that by agreeing to a tighter fiscal pact that the ECB would agree to do something to support government bond markets,” said Kate Warne, Canadian markets specialist at Edward Jones in St. Louis.

“So we have begun to solve the longer term problem but haven’t done anything to address the short term problem.”

The ECB had made it plain before Friday’s summit that it would not be increasing purchases of bonds.

Italy has been forced to sell bonds recently with yields over the seven per cent threshold.

Disappointment at the lack of ECB action was felt on bond markets Monday.

Although Italy managed to raise C7 billion in an auction of 12-month bonds, its yields on the secondary market, where the issued bonds are then traded freely, continued to rise.

Its 10-year bond yield was up 0.49 of a percentage point at 6.72%, not far from the seven per cent level that is considered unsustainable in the longer term. The rise in the yields indicates investors are more worried that the country might eventually default.

The TSX was pressured by commodity prices which fell back on demand concerns and the higher U.S. dollar. A stronger greenback usually helps depress commodity prices, which are denominated in dollars, as it makes oil and metals more expensive for holders of other currencies.

The base metals sector was the largest decliner, down almost three per cent as copper prices declined with the March contract on the New York Mercantile Exchange off nine cents to US$3.46 a pound. Teck Resources (TSX:TCK.B) gave back 87 cents to C$37.05 and Ivanhoe Mines (TSX:IVN) shed 94 cents to $21.28.

The gold sector also fell almost three per cent as the February bullion contract on the Nymex fell $48.60 to US$1,668.20 an ounce. Goldcorp Inc. (TSX:G) faded $1.68 to C$49.52 while Kinross Gold Corp. (TSX:K) was down 57 cents to $13.04.

The energy sector fell 1.73 cent while the January crude contract in New York lost $1.64 to US$97.77 a barrel. Canadian Natural Resources (TSX:CNQ) fell 40 cents to C$37.26.

Canadian oil giant Suncor Energy Inc. (TSX:SU) says it is pulling out of Syria as a result of sanctions announced by the European Union on Dec. 2. Suncor also says that it would not change its production guidance for this year and next as output in Libya was rising and its shares declined 79 cents to $29.06.

Financials also helped take the TSX lower as Royal Bank (TSX:RY) fell 90 cents to $48.57.

Sun Life Financial Inc. (TSX:SLF) will stop selling variable annuity and individual life policies in the United States starting Dec. 30 and will cut 800 jobs. The move comes after Sun Life faced massive charges in the third quarter as it hedged against future liabilities related to the insurance products. Its shares advanced $1.54 to $19.86.

A late day gain in telecom stocks helped the TSX pare early losses. Rogers Communications (TSX:RCI.B) gained 57 cents to $37.33.

European bourses were also negative. London’s FTSE 100 index backed off 1.83%, Frankfurt’s DAX fell 3.36% and the Paris CAC 40 declined 2.6%.

In other corporate news, Encana Corp. said there are serious flaws with a U.S. government report that links its Wyoming natural gas wells to groundwater pollution and that independent analysis of the data must be undertaken. The Calgary-based energy giant (TSX:ECA) said the report should not have been released before being verified by third-party scientists. EnCana shares were down 54 cents at $19.01.

A judge has approved a class-action lawsuit against Air Canada (TSX:AC.B) under which both disabled people and those with a functional disability related to obesity, had to pay extra for seats from Dec. 5, 2005 to Dec. 5, 2008. Its shares added three cents to $1.11.

Chip maker Intel Corp. has cut its fourth-quarter revenue due to shortages of hard disk drives. Intel now expects fourth quarter revenue of US$13.4 billion to $14 billion. It had previously forecast revenue of $14.2 billion to $15.2 billion for this key holiday quarter. Floods in Thailand have disrupted computer manufacturers’ production since many companies have factories there. Intel shares fell 4.04% to US$24.