TSX down amid talk of expansion of European bailout fund

BMO’s quarterly profit rose 21% to $897 million with results helped along by the acquisition of Wisconsin-based Marshall & Ilsley. On an adjusted basis, profit was $1.27 a share, four cents less than analysts had expected, according to Thomson Reuters. BMO shares fell $2.10 or 3.5% to $57.74.

The TSX Venture Exchange lost 10.66 points to 1,542.69.

The Canadian dollar rose as the Bank of Canada announced it was leaving its key rate unchanged at one per cent. The loonie gained 0.7 of a cent to close at 99.05 cents US.

Canada’s central bank had been widely expected to leave rates alone amid slowing global economic conditions and uncertainty surrounding the future of the eurozone because of the European government debt crisis.

The bank said in a statement those pressures haven’t let up, indicating it is in no rush to hike rates.

The TSX was negative most of the day after S&P warned that it may downgrade the European bailout fund’s AAA long-term credit rating. It says it could downgrade the rating of the European Financial Stability Facility by one or two notches.

The news came a day after S&P warned of a possible downgrade of the credit rating of 15 eurozone countries, including continental economic powerhouse Germany.

But sentiment picked up late in the session after the Financial Times said negotiators are considering allowing the eurozone’s existing C440 billion bail-out fund to continue running when a new C500 billion facility comes into force in mid-2012.

Such a move would almost double the firepower of the bloc’s financial rescue system.

New York’s Dow Jones industrial average climbed 52.3 points to 12,150.13.

The Nasdaq composite index lost 6.2 points to 2,649.56 the S&P 500 index was 1.39 points higher to 1,258.47.

Meanwhile, German Chancellor Angela Merkel tried to downplay S&P’s statements, saying that she expected a meeting of European leaders later this week in Brussels would help restore markets’ confidence.

“S&P is being prudent,” said Sadiq Adatia, chief investment officer at Sunlife Global Investments.

“If they’re going to downgrade U.S. from its triple-A status, why wouldn’t they downgrade Europe? This should not be a shock to anyone. It’s just coming at a bad time more than anything else.”

The original S&P announcement Monday came just hours after Merkel and French President Nicolas Sarkozy urged changes to the European Union treaty that would centralize decision-making on spending and borrowing for the 17 countries that use the euro.

The treaty proposal is set to form the basis of discussions at the EU summit in Brussels on Friday.

Tighter political and economic co-ordination among euro countries is seen as a precursor to further financial aid from the European Central Bank, the International Monetary Fund, or some combination.

But a tighter union would likely also result in heavier financial burdens for the region’s stronger economies, which have already put up billions of euros to rescue Greece, Ireland and Portugal.

S&P said its decision was “prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.”

Deterioration of credit ratings makes borrowing more expensive.

This would be particularly bad news at a time when the eurozone is struggling to increase its bailout fund and recapitalize European banks.

Markets have been jittery because of fears that the euro might disintegrate, causing a sharp recession in Europe that would spread through the world economy. But investors have felt more optimistic in recent days on the conviction that eurozone leaders are finally serious about settling the debt crisis once and for all.

“The question now is, will people will continue to feel a bit optimistic for the rest of the year,” said Adatia.

“You just need a couple of bad negative reports out of the eurozone and markets are off again.”

Transport stocks pushed the industrials sector down 1.49% as Canadian National Railways (TSX:CNR) fell $1.47 to $78.39.

Bombardier Inc. (TSX:BBD.B) shares lost 18 cents to $3.78. The transport giant said that it expects to nearly double its revenues and boost its profit margins in five years, once it completes major new development projects and expands sales to emerging markets.

The TSX energy sector lost ground, down 0.78% with the January crude contract on the New York Mercantile Exchange ahead 29 cents to US$101.28. Suncor Energy (TSX:SU) fell 29 cents to $30.87 and Imperial Oil (TSX:IMO) down $1 to $43.20.

The gold sector rose about one per cent as bullion prices pared early losses with the February contract closing down $2.70 to US$1,731.80 an ounce. Goldcorp Inc. (TSX:G) gained 70 cents to $52.54.

The base metals sector was the strongest group amid major acquisition activity in the Canadian resource sector. Quadra FNX Mining Ltd. (TSX:QUX) said it is being bought by Poland-based copper and silver producer KGHM Polska Miedz for $3.5 billion in cash. Shareholders of Vancouver-based Quadra FNX will receive $15 in cash for each common share of the company. Its shares surged $4.53 to $15.88.

Hopes for other acquisitions at fat stock premiums helped push the sector up four per cent. HudBay Minerals (TSX:HBM) gained 17 cents to $10.36 and Major Drilling Group (TSX:MDI) ran ahead 70 cents to $15.

Copper prices were lower with the March contract on the Nymex down four cents to US$3.58. News that China was easing lending in order to encourage growth pushed copper prices up almost 10% last week. China is the world’s biggest consumer of the metal.

In other corporate news, Precision Drilling Corp. (TSX:PD) announced it will take a charge of up to $120 million in the fourth quarter on the decommissioning of 36 drilling rigs and 13 service rigs. Its shares fell 52 cents to $11.22.