Markets close sharply lower as global worries persist

North American markets posted large losses Monday on concerns about the pace of the American recovery and the continuing European debt crisis.

TSX falls 1.4%

A trader works on the floor at the New York Stock Exchange on Monday. The Dow Jones industrial average lost 151.44 points, or 1.2 per cent, to close at 12,505.76 Monday. (Seth Wenig/Associated Press)

North American markets posted large losses Monday on concerns about the pace of the American recovery and the continuing European debt crisis.

In Toronto, the S&P/TSX composite index closed down 191.95 points, or 1.4 per cent, to 13,179.75.

New York markets were also negative as the Dow Jones industrial average slumped 151.44 points, or 1.2 per cent, to 12,505.76.

The Nasdaq composite index was off 57.19 points, or two per cent, to 2,802.62 while the S&P 500 index declined 24.31 points, or 1.8 per cent, to 1,319.49.

Washington announced Friday that the American economy created just 18,000 jobs in June, a fraction of the figure expected.

Also weighing on markets was uncertainly about how U.S. legislators will deal with the country's budget deficit. President Barack Obama and top legislators resumed tense budget talks Monday at the White House, with both sides under pressure to reach a deal to stave off a potentially disastrous first-ever default on U.S. obligations.

An Aug. 2 deadline looms to raise the debt limit, the amount of money the U.S. government is allowed to borrow.

Nervousness about the European debt crisis  was renewed as bond traders pushed up the cost of borrowing for Spain and Italy, fearing that the risk of default on government debt might spread beyond Greece, Ireland and Portugal and demanding a higher yield to take on the risk of holding their debt.

Bond yields rise

Yields on Spanish 10-year bonds rose from 5.7 per cent at the start of trading to 5.9 per cent, while the yield on Italian 10-year bonds increased to 5.6 per cent from 5.3 per cent, following sharp rises on Thursday and Friday.

Eurozone finance ministers were meeting in Brussels Monday to discuss the crisis.

Intense debate over how and how much money banks and other private investors can contribute to a new rescue package for Greece has unsettled financial markets in the currency union, most dramatically in Italy.

"Previously we've been worried about Greece, Portugal and Ireland which are pretty small and peripheral countries," said Kate Warne, Canadian markets specialist at Edward Jones in St. Louis. Those three countries have all received bailouts from the EU and International Monetary Fund.

"Italy is a much greater concern and that weighs."

Worries that Italy could be engulfed in the financial crisis pushed the interest rate on a 10-year Italian bond up to 5.64 per cent, while the rate on the German equivalent, considered the safest in the eurozone, traded at 2.67 per cent.

Italy's high debt of nearly 120 per cent of GDP and poor growth prospects have made it vulnerable to the eurozone's debt crisis. Two ratings agencies have warned the country needs to get its public finances in order or risk a downgrade.

Bank stocks were whacked on Italy's main stock market, with Unicredit dropping by as much as 10 per cent and Intesa Sanpaolo by nine per cent, before recovering a bit on closing.

Tourists pass a street beggar in central Rome on Monday. Italy's public debt is almost 120% of GDP. (Filippo Monteforte/AFP/Getty Images)

Rating agencies warn that even a voluntary involvement in a rescue package by private banks will likely be seen as a partial default of Greece on its massive debts.

"They're now beginning to address the fact that as we all know Greece won't be able to pay back those loans and the question is, what do you do about it?" added Warne.

"While it's not good news for the markets today, it's good news we are getting some serious discussions in Europe about how do you tighten things up and what do you do, even though it raises issues that investors have been choosing to ignore up until the last few days."

The uncertainty led investors to buy U.S. treasuries and push up the value of the greenback.

The Canadian dollar fell 0.89 of a cent to 103.20 cents US.

"Fear is driving broad-based U.S. dollar strength on safe haven flows, with all majors showing weakness," observed Scotia Capital strategist Eric Theoret.

"Debt worries have come to the fore as upward movement in European bond yields reflect rising concern spreading to the core amid talk of a partial Greek default and an enlarged EU bailout fund."

Oil, which is priced in U.S. dollars, fell. The August crude contract on the New York Mercantile Exchange dropped $1.05 to $95.15 US a barrel.

Gold rose, however, because of its value as an alternative currency. The August bullion price rose by $7.60 to $1,549.20 US an ounce.

With files from The Canadian Press and The Associated Press