TSX closes lower on U.S. economic worries, European debt crisis

The S&P/TSX composite index tumbled 147.95 points to 11,759.94 while the TSX Venture Exchange was down 32.49 points to 1,458.43.

The dollar failed to respond to a spike in crude prices as people bought into U.S. Treasuries and the loonie lost 0.79 of a cent to 96.69 cents US.

The Dow industrials fell 66.45 points to 11,954.94, the Nasdaq lost 32.99 points to 2,579.27 and the S&P 500 index was down 10.74 points to 1,225.73.

The Fed committed to leaving rates near zero until well into 2013 while also holding off on any new steps to boost the economy.

The U.S. central bank said the American economy has been expanding moderately despite a global slowdown, that recent indicators point to some improvement in labour market conditions and that household spending has continued to advance.

But it added that the jobless rate will decline only gradually and that business investment appears to be growing less rapidly while strains in global financial markets pose significant downside risks.

“The Fed is clearly in wait and see mode,” said TD Bank senior economist James Marple.

“Until the situation in Europe deteriorates further — and there are a number of reasons to believe it will — the Fed is unlikely to change course on policy. However, if European financial conditions continue to worsen and the drag from global growth begins to show up in the U.S., the Fed is likely to react with a third round of quantitative easing.”

Strong gains on U.S. markets had been sharply pared earlier in the session after media reports that German Chancellor Angela Merkel had turned down the idea of boosting the ceiling of the European Stability Mechanism, a permanent rescue fund for the euro area.

Markets were initially optimistic at the end of last week after European Union countries agreed to adopt a new European Union fiscal pact that would see a central authority overseeing budgets and impose tighter controls on spending by member countries. This would be backed up by automatic penalties if countries spend too much.

But there is nervousness over the lack of tools to deal with short- term issues, including the unwillingness of the European Central Bank to ramp up bond purchases of heavily indebted countries such as Italy and Spain to keep their borrowing costs under control.

Sentiment has also taken a hit after rating agencies Moody’s and Fitch both said the deal was insufficient and would not materially address the crushing debt loads of some countries or their rising borrowing costs.

Moody’s warned that it will review all EU governments’ ratings for possible downgrades in early 2012.

Investors are also awaiting the response of rival agency Standard & Poor’s. Last week it warned that it could downgrade most of the eurozone economies, including Germany, if the deal failed to deliver.

Earlier, there had been some rare good news from the eurozone as a closely watched survey showed that German investor sentiment rose in December following nine straight falls.

ZEW’s main investor sentiment index for December rose 1.4 points to minus 53.8 points overall. However, analysts had forecast a bigger rise to minus 52.

The survey also recorded a five-point rise in economic sentiment for the 17-country eurozone, taking the index up to minus 54.1 point.

“I think any time you do (get good news from the eurozone) it raises the confidence level a bit but not enough to make it sustainable,” said Fred Ketchen, manager of equity trading at Scotia Capital.

“I think there are a lot of questions yet to be answered in Europe.”

Traders also took in data showing a tepid start to the Christmas retail season in the U.S.

The Commerce Department said Tuesday that retail sales rose 0.2% in November, lower than the 0.6% rise that economists had expected.

The TSX energy sector fell 1.22% while oil prices advanced with the January crude contract on the New York Mercantile Exchange ahead $2.37 to US$100.14 a barrel. Some analysts attributed the spike in oil prices to military exercises being conducted by Iran in the Strait of Hormuz, a narrow, strategically important waterway between the Gulf of Oman in the southeast and the Persian Gulf. It is a major exit point for Mideast oil shipments.

Cenovus Energy (TSX:CVE) fell $1.08 to $32.95 while Canadian Natural Resources (TSX:CNQ) dropped 48 cents to C$36.78.

Elsewhere on the TSX, the base metals sector led decliners, down 5.77% as March copper fell two cents to US$3.44 a pound.

Ivanhoe Mines (TSX:IVN) was the major decliner in the group, tumbling $4.71 or 22.13% to $16.57. The drop came after international mining giant Rio Tinto was successful in its arbitration challenge against certain provisions of a poison pill defence adopted by Ivanhoe aimed at preventing an unwanted takeover.

Elsewhere in the sector, Teck Resources (TSX:TCK.B) lost $1.53 to $35.52, while First Quantum Minerals (TSX:FM) fell 82 cents to $19.23.

The gold component fell about three per cent while the February gold contract dropped $5.10 to US$1,663.10 an ounce. Barrick Gold Corp. (TSX:ABX) faded 94 cents to C$48.29 and Goldcorp Inc. (TSX:G) fell $1.42 to C$48.10.

Research In Motion Ltd. (TSX:RIM) was also a major weight, losing 64 cents to $16.01. Shares in the BlackBerry maker, which reports earnings on Thursday, earlier hit a fresh 52-week low of $15.85.