Stock markets lower

The Canadian dollar lost ground as investors avoided risk and bought into U.S. Treasuries. The loonie fell 0.8 of a cent to 97.39 cents US.

U.S. markets were also lower as the Dow Jones industrial average fell 118.82 points to 12,065.44. The Nasdaq composite index lost 39.43 points to 2,607.42 while the S&P 500 index was down 14.92 points to 1,240.27.

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.

“The lack of increased European Central Bank involvement remains a sore spot,” observed BMO Capital Markets senior economist Benjamin Reitzes.

The ECB had made it plain before Friday’s summit that it would not be ramping up purchases of bonds from heavily-indebted countries like Italy and Spain as a way of keeping borrowing costs lower. Italy has been forced to sell bonds with yields over the seven per cent threshold.

The verdict on the summit from credit rating agency Moody’s wasn’t encouraging.

“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, rival agency 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.

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

Although Italy managed to raise €7 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.

Spanish yields were also up sharply Monday, with its benchmark 10-year bond up 0.28 of a point to 5.964%.

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 gold sector was the biggest percentage decliner, down almost three per cent as the February bullion contract on the New York Mercantile Exchange fell $44.60 to US$1,672.20 an ounce. Goldcorp Inc. (TSX:G) faded $1.48 to $49.72.

The energy sector fell almost two per cent while the January crude contract on the New York Mercantile Exchange lost $1.40 to US$98.01 a barrel. Canadian Natural Resources (TSX:CNQ) fell 54 cents to $37.12.

Canadian oil giant Suncor Energy Inc. 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 55 cents to $29.30.

Copper prices declined with the March contract on the Nymex down nine cents to US$3.47 a pound, pushing the base metals sector down 2.5%.

Financials also helped take the TSX lower as Royal Bank (TSX:RY) fell 52 cents to $48.95.

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 nine cents to $18.41.

European bourses were also negative. London’s FTSE 100 index backed off 0.72%, Frankfurt’s DAX fell 2.05% and the Paris CAC 40 declined 1.79%.

Asian stocks mostly closed higher, as they caught up with the gains made in Europe and the U.S. on Friday.

Japan’s Nikkei 225 index jumped 1.4%, South Korea’s Kospi added 1.3% and benchmarks in Singapore, Taiwan, Australia and Indonesia also rose.

Hong Kong’s Hang Seng was up marginally and China’s Shanghai Composite Index fell one per cent.

In other corporate news, 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 fell two cents to $1.06.

Traders skeptical about European Union agreement