Stock markets tumble after Greece stuns investors with referendum plan

The S&P/TSX composite index closed well off the worst levels of the day, coming back from a 338-point plunge to finish the session down 136.95 points to 12,115.1 amid a solid gain in the gold sector. The junior TSX Venture Exchange fell 26.02 points to 1,588.88.

The confusion was heightened after reports that the referendum might not actually take place. CNBC cited a Greek Socialist party official as saying the referendum call by Greek prime minister George Papandreou is “basically dead.”

Then, Reuters reported near the end of the session that Papandreou told his cabinet Tuesday that the vote will go ahead.

The Canadian dollar also got caught up in worries the Greek government could lose the vote, which is expected early next year. The fell 2.18 cents US to 98.15 cents US after going as low as 97.96 cents US as traders piled into the safe haven status of the U.S. dollar.

If the vote does go against the bailout, Europe could face a messy and disorderly debt default and Greece could end up pulling out of the euro as a currency.

U.S. markets closed around its worst levels of the day, as the Dow industrials fell 297.05 points at 11,657.96, the Nasdaq was off 77.45 points at 2,606.96 and the S&P 500 index dropped 35.02 points to 1,218.28.

The announcement of the referendum late Monday came just five days after European officials outlined a plan to deal with the fact that Greece cannot pay its debts on time.

The three-pronged strategy involved boosting a bailout fund, getting private creditors to take a bigger hit on their Greek debt holdings and forcing banks to raise more capital. Market optimism about the plan had already started to wear thin Monday as analysts looked for more specific details on how the plan would work.

Beyond the lack of a clear date for the Greek vote, there is also no clarity on what the question would be.

“It seems to have undone a lot of the positive feeling that came with that announcement in the middle of last week,” added Small.

“Hopefully, in time we will understand a bit more what’s going to happen, how the referendum is going to work, what question will be posed and, hopefully, we can see some positive out of what is happening there.”

A confidence vote in Papandreou’s Socialist government will also take place at the end of this week.

But it was not even clear Papandreou’s government could last long enough for the proposed vote to take place _ or even last until a confidence vote on Friday.

At least four Socialist lawmakers have openly rebelled. One defected, whittling Papandreou’s parliamentary majority to just two deputies in the 300-member legislature.

The TSX was under particular pressure from the resource sector as the higher U.S. dollar and worsening demand prospects inherent in European instability sent commodity prices lower.

A stronger greenback usually helps depress commodity prices, which are denominated in U.S. dollars, as it makes oil and metals more expensive for holders of other currencies.

The TSX energy sector fell 2.09% as the December crude contract on the New York Mercantile Exchange fell $1 to US$92.19 a barrel. Suncor Energy (TSX:SU) fell 83 cents to C$30.92 while Canadian Natural Resources (TSX:CNQ) dropped $1.11 to $34.05.

Metal prices also retreated as the December copper contract in New York dropped 13 cents to US$3.50 a pound, sending the base metals sector down 3.39%. Teck Resources (TSX:TCK.B) backed off $1.87 to C$38.09 while Quadra FNX Mining (TSX:QUX) lost 26 cents to $11.24.

But the market gained support from the gold sector, which gained more than two per cent even as gold prices declined for a third day. The December contract on the Nymex moved down $13.40 to US$1,711.80 an ounce. But the gold sector gained as Goldcorp Inc. (TSX:G) rose $1.45 to $49.95 while Barrick Gold Corp. (TSX:ABX) climbed $1.09 to US$50.30.

Worries over how a messy default could damage the eurozone’s banks pushed the TSX financial system down 2.73%. Royal Bank (TSX:RY) lost $1.58 to $47.04 while Manulife Financial (TSX:MFC) declined 74 cents to $12.42.

Risk appetite was further dulled by data showing weaker than expected manufacturing growth in China as a government industry group reporting the slowest growth in nearly three years.

The China Federation of Logistics and Purchasing said Tuesday that its monthly purchasing managers index fell an unexpectedly large 0.8 percentage point to 50.4, just above the 50-level that signifies expansion. It forecast the economy would continue to slow in the last months of the year.

China’s huge appetite for commodities has driven prices for oil and copper sharply higher and also supported the resource heavy TSX. Its growth is seen as critical in supporting a fragile global economic recovery.

There was also a sign of slowing expansion in the U.S. manufacturing sector. The Institute for Supply Management’s index for October came in at 50.8, down from 51.6 in September and worse than the 52.2 reading that markets had expected.

European indexes were hit particularly hard by news of the Greek referendum with London’s FTSE 100 index down 2.21%, Frankfurt’s DAX fell back five per cent and the Paris CAC 40 lost 5.38%.

In earnings news, global information services company Thomson Reuters Corp. (TSX:TRI) earned US$381 million or 44 cents a share in the third quarter as the company outdid analyst expectations with higher revenue. Its shares were up 21 cents to $29.70.

Oil and gas pipeline company TransCanada Corp. (TSX:TRP) said net income attributable to common shares rose 11% in the third quarter to $384 million on stronger revenues. Earnings were 55 cents on a per share basis, falling short of analyst expectations of 57 cents per share and its shares were down 28 cents to $42.09.