Market plunge deepens as investor fears grow

North American financial markets witnessed another massive sell-off on Monday as investors grew increasingly worried about the health of the global economy.

Asian markets retreat

Traders work on the floor of the New York Stock Exchange at the opening bell Monday. (Stan Honda/AFP/Getty)

North American stock markets witnessed another massive sell-off on Monday as investors grew increasingly worried about the health of the global economy. 

In Toronto, the S&P/TSX composite index closed with a loss of 491.21 points, or roughly four per cent, at 11,670.96. It has now lost 1,145 points over three trading days. 

In New York, the Dow Jones industrial average tumbled below 11,000, falling 634.76 points, or 5.55 per cent, to 10,809.85. The Dow's decline was the steepest since Dec. 1, 2008.

The Nasdaq was off 174.72 points, or 6.9 per cent, to 2,357.69, and the S&P fell 79.91 points, or 6.66 per cent, to 1,119.47.

According to a Bloomberg report, all of the stocks in the S&P 500 index declined on "for the first time since at least 1996."

The selling picked up again early Tuesday in Asia. Japan's benchmark Nikkei 225 index was off nearly 5 per cent, while Hong Kong's Hang Seng index shed more than 7 per cent, The Associated Press reported.

Monday's losses came even as U.S. President Barack Obama dismissed the first-ever downgrade of the U.S. credit rating.

Obama said Standard & Poor's decision on Friday — cutting  the long-term credit rating  for the U.S. by one notch to AA+ from AAA — would at least give Congress a renewed sense of urgency to tackle debt problems.

He said it must be done mainly by taking on the politically difficult issues of reforming taxes and social programs in coming months.

"Markets will rise and fall," he said, in his first public comments on the credit downgrade. "But this is the United States of America. No matter what some agency may say, we've always been and always will be a triple-A country."

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Last week, the Dow fell 698.63 points, its biggest one-week point loss since October 2008, during the financial crisis. The Dow has dropped in nine of the last 11 trading days.

The price of gold streaked past $1,700 US an ounce for the first time as investors fled currencies to buy the metal as a store of wealth. December gold gained $61.40 to close at $1,713.20 US.

It has nearly doubled in price since the start of 2009.

Still, adjusted for inflation, an ounce of gold remains below its 1980 peak of $850, or $2,400 at current levels.

Another refuge for currency traders, the Swiss franc, hit record highs against the U.S. dollar.

By early evening in Zurich, the dollar was worth 0.7525 Swiss francs, marginally up from its earlier record low of 0.7485.

The Swiss franc is 30 per cent stronger against the dollar than a year ago, weighing heavily on Switzerland's export and tourism industries.

The Canadian dollar finished down 1.32 cents to 100.92 cents US.

Oil — Canada's biggest commodity export — fell sharply. The September crude contract on the New York Mercantile Exchange retreated $5.57 to close at $81.31 US a barrel after falling about $8 US last  week. The S&P/TSX energy index was down 7.2 per cent.

The Dow closed down more than 600 points Monday. (Mario Tama/Getty)

The borrowing costs of both Spain and Italy dropped sharply Monday after the European Central Bank signalled it would intervene in the markets to keep the two countries' bond prices supported.

Traders said the European Central Bank spent around €2 billion ($2.8 billion Cdn), and the yield on Italy's 10-year bonds fell 7/10ths of a percentage point to 5.30 per cent while Spain's tumbled 9/10ths of a percentage point to 5.14 per cent.

Growing concerns about the two countries' high government debt levels and lacklustre economic growth pushed their borrowing costs to above six per cent last week — rates that are deemed unsustainable in the long term for the eurozone's third and fourth largest economies.

Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.

"We will remain in close contact throughout the coming weeks and co-operate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets," they said.

But some analysts cautioned that buying up the bonds of deeply indebted governments transfers significant risk to the balance sheet of an institution long reluctant to move beyond its traditional role controlling inflation.

Others expressed fears that the ECB could end its bond-buying too soon, causing rates to rise again. Bond yields and prices move in opposite directions; purchases that drive up the price also reduce the interest rate countries face on new bonds.

The ECB has been reluctant to become directly involved in Europe's 21-month-old financial crisis, instead pushing politicians to get their countries' finances under control and give the eurozone's €440-billion rescue fund the power to buy government bonds on the open markets.

S&P/TSX energy index 3-month chart

On Monday morning, Standard & Poor's downgraded the credit ratings of U.S. mortgage businesses Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt.

The agency has also lowered the ratings for farm lenders, long-term U.S. government-backed debt issued by 32 banks and credit unions and three major clearinghouses, which are used to execute trades of stocks, bonds and options.

All the downgrades were from AAA to AA+. S&P said the agencies and banks all have debt that is exposed to economic volatility and a further downgrade of long-term U.S. debt.

"What we've gone through in the last few weeks especially with the circus in the U.S. Congress and the inability of Europe to really deal with its sovereign debt issues have undermined investor and business confidence," said Norman Raschkowan, North American strategist at Mackenzie Financial.

"And the big question mark now is whether you will see behaviour change. And that is what people are concerned about and why you have growing concerns about a double dip [recession] in the economy."

"The ratings agency's move outweighed relief at a European Central Bank pledge to buy up Italian and Spanish bonds to help the two countries avoid devastating defaults," he said.

Some analysts said the downgrades were unlikely to have much effect on the companies named by S&P or the broader markets.

They noted that treasury yields remain low and the dollar is getting stronger — signs that the world still sees the U.S. as a safe harbour in volatile economic times.

The German DAX index closed down 5.02 per cent. (Ralph Orlowski/Getty)

The downgrades "are as meaningless as the original action," said Daniel Alpert, managing partner at the investment bank Westwood Capital LLC in New York. He said that investors are rushing into treasury notes, and that they will do the same for "anything backed by the full faith and credit" of the U.S. government.

In Europe, the German DAX index closed down 5.02 per cent and the French CAC 40 index fell 4.7 per cent. In Asia, Japan's Nikkei 225 index fell 2.2 per cent, and the South Korean Kospi index fell 3.8 per cent.

Also on Monday, Greece banned short selling on the stock market for two months from Tuesday, after shares on the Athens Stock Exchange plunged to their lowest level in more than 14 years.

Its benchmark index sank below the 1,000-point mark Monday, closing down six per cent at 998.24 — the lowest level since January 1997.

Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected. The economy grew at a 1.3 per cent annual rate between April and June, below economists' expectations of 1.7 per cent.

The U.S. Federal Reserve will meet on Tuesday, but economists don't expect much to come out of the meeting. The central bank's key interest rate is already at a record low of nearly zero, where it has been since 2008. The Fed has already said it plans to keep rates low for "an extended period."

With files from The Canadian Press and The Associated Press