Stocks plunge amid worries European debt crisis getting worse

The Canadian dollar was off 0.51 of a cent to 97.25 cents US as investors bought into the perceived safe haven of U.S. Treasuries.

The Dow Jones industrial average lost 134.86 points to 11,770.73. The Nasdaq composite index fell 51.62 points to 2,587.99 while the S&P 500 index was 20.78 points lower at 1,216.13.

The results of a Spanish debt auction soured moods after the country paid just over seven per cent to raise €3.56 billion in 10-year bonds, the highest rate since 1997 and a level seen as unsustainable over the long term.

Greece, Ireland and Portugal had to request rescue loans from the European Union after their bond yields jumped above the seven per cent threshold.

But Spain, like Italy, is a much trickier proposition to rescue since its economy is bigger and has more debt.

Italian bond yields also touched the seven per cent level during the session.

“You could say the markets are recording a vote of non-confidence,” said Robert Gorman, chief portfolio strategist at TD Waterhouse.

“They’re very much in a ‘show-me’ state of mind and the Italians and others are going to have to come up with some pretty clear — and clear is the operative word here — statements about exactly what they’re going to do, not just talk about it, with measurable targets and timelines.”

Further darkening the mood was a statement from ratings agency Fitch that Italy is already likely in recession.

Fitch downgraded Italy to A-plus from AA-minus with a negative outlook last month. And it also warned that it would cut the country’s ratings to the low investment grade category if it were unable to borrow at sustainable rates on the markets.

Markets frustrated with the failure of eurozone leaders to come up with a comprehensive solution to the region’s government debt crisis have been demanding ever higher interest rates to buy bonds from heavily indebted countries.

The crisis has been a huge weight on stock markets for months on worries that it will plunge Europe back into recession, possibly dragging the rest of the global economy into a downturn and inflicting severe damage on the financial system.

It was another session where positive economic data was overshadowed by Europe.

A widely watched regional manufacturing index, the Philadelphia Fed, slowed to a reading of 3.6 in November from 8.7 in October.

But Gorman pointed out that future intentions in the index were very positive. “There are indicators of future activity and they strengthened notably,” he said.

“A broad indicator of future activity increased 15 points to the highest number in eight months (while) the percentage of firms expected to increase employment over the next six months is 37 per cent, the highest number in eight months.”

Last week, the number of Americans seeking unemployment benefits fell to the lowest level in seven months. Applications declined to 388,000, but remained above the 375,000 claims level below which economists say signals sustained job growth.

Building permits jumped 10.9%, which was much higher than economists expected. That may be another sign that the U.S. economy is not headed for another recession.

European indexes also fell heavily as London’s FTSE 100 index dropped 1.56%, Frankfurt’s DAX lost 1.07% and the Paris CAC 40 was down 1.78%.

Commodity prices continued to be volatile because of worries that a slowing global economy will need much less oil and metals. Lower commodities would, in turn, pressure energy and mining stocks on the resource-heavy TSX.

Oil prices headed lower with the December contract on the New York Mercantile Exchange down $3.77 to US$98.82 a barrel, more than erasing Wednesday’s gain.

Prices had surged over US$3 to a five-and-a-half-month high in the wake of a deal involving Enbridge Inc. (TSX:ENB) that will see the Canadian pipeline company pay US$1.15 billion to buy half ownership of a U.S. pipeline system. Enbridge said the direction of crude oil flows in the Seaway pipeline will be reversed to enable it to transport oil from the main oil supply hub at Cushing, Okla., to the Gulf Coast. That would help unclog a glut of supply at Cushing, which has recently driven down the price for oil.

Enbridge was a rare, bright spot on the TSX Thursday, rising $1.02 to C$35.93.

The TSX energy sector fell 2.44% as Cenovus Energy (TSX:CVE) declined $1.12 to C$32.82 and Suncor Energy (TSX:SU) lost 93 cents to C$31.82.

Fears about the fallout from stressed European banks pushed the TSX financials sector down almost two per cent and Scotiabank (TSX:BNS) dropped $1.42 to $49.32 and Royal Bank (TSX:RY) fell $1.15 to $43.95.

Bullion prices also retreated with the December contract down $54.10 to US$1,720.20 an ounce. Barrick Gold Corp. (TSX:ABX) shed $1.99 to C$50.66 and Goldcorp Inc. (TSX:G) gave back $1.14 to C$52.38.

The base metals sector was off four per cent as metal prices also fell heavily with the December copper contract down 10 cents to US$3.38 a pound. Teck Resources (TSX:TCK.B) dropped $1.62 to C$35.83 and First Quantum Minerals (TSX:FM) was down 69 cents to C$17.90.

The industrials sector fell 1.48% as Canadian Pacific Railway (TSX:CP) shed 88 cents to $60.63.

On the acquisition front, Nova Scotia-based frozen seafood giant High Liner Foods Inc. (TSX:HLF) is buying Icelandic Group’s U.S. and Asian processing plants for about US$230.6 million. Icelandic Group is one of the largest suppliers of value-added seafood to the U.S. food service market. High Liner shares rose 49 cents to $14.99.