Money world

Falling oil prices and investor fears of a global recession pummelled the Canadian stock market again today, dragging the benchmark index to its biggest intraday loss ever as concerns heightened that the Wall Street financial crunch has dragged the Canadian economy into a deep freeze and seized up bank lending around the world.

The Toronto stock market plunged nearly 1,200 points in early trading before clawing back more than half of the loss to close down about 573 points, five per cent, or about $75 billion of paper losses.

At one point the index fell below 10,000 points for the first time in more than three years, wiping out all the gains of the market since mid-2005.

The Bay Street selloff continued a wave of volatile trading that has seen huge swings up and down as investors worry about the global credit crunch and its impact on the Canadian and global economies.

Canada’s main stock index lost 11 per cent last week, evaporating $150 billion in value, as recession worries spooked traders around the world.

“People are scared and the only thing they’re doing is selling,” said Ryan Detrick, senior technical strategist at U.S.-based analyst firm Schaeffer’s Investment Research.

While the broader economy seems headed into recession — technically two quarters of shrinking output — the jobless rate in Canada is still less than half the unemployment of the early 1980s, during the worst recession in the post Second World War era.

However, further cuts in manufacturing, retail, housing and other sectors — because of tight money, the slump in the United States and market turmoil around the world — could push Canada’s jobless rate sharply higher over the next several months.

In cutting output today at mills in Quebec and British Columbia, Montreal-based forestry giant Tembec cited lower demand from Asia for the pulp it exports to make paper.

About half the Canadian market is made up of energy, metals and other commotities stocks, so any weakness in global demand will punish the resources sector as well as the Canadian dollar.

On currency markets today, the loonie dropped 1.5 cents to close just under 91 cents US.

Canada’s economy has grown only marginally since the beginning of the year, with exports and manufacturing squeezed by the slumping United States.

Economists from Canada’s Big Five banks said they expect little or no economic growth in the near future and warned that the domestic gloom will deepen into something worse than a recession.

In their most recent economics forecast, Scotiabank economists predict recessions for both the U.S. and Canada, economic slides that they say will require central bankers in both countries to cut interest rates by at least a full percentage point to rekindle growth.

The word “recession” wouldn’t describe the deep structural problems affecting everything from the U.S. housing sector to the Canadian oil industry, said Bank of Nova Scotia chief economist Warren Jestin.

“You have to invent a new word to describe what we’re in now,” he said. “It’s being driven through the financial markets into the real economy.”

On Wall Street, the Dow Jones industrials sank 360 points, joining a global stocks meltdown triggered by investor fears the financial systems in the United States and other countries need more than government bailouts to fix.

Meanwhile, the credit markets remain stagnant, a sign that banks are too afraid to lend.

Finance Minister Jim Flaherty, who has consistently said Canada’s economy and banking system is in better shape that their American counterparts, repeated that again today but said even the largest financial institutions could be feeling the squeeze

“Canada’s financial system has handled the persistent global market turmoil very well,” Flaherty said in a statement.

”Nonetheless, Canada’s financial system is not immune to the ongoing turmoil in global credit markets. The deterioration of global credit markets is beginning to squeeze the ability of even the strongest of financial institutions to raise longer-term funds, which could limit the provision of longer-term credit in Canada to businesses and households.”

Flaherty said he supports the Bank of Canada’s decision to inject at least $20 billion of extra cash into the financial system by mid-November and said the government “stands ready to take whatever actions may be necessary to protect the stability of the Canadian financial sector.”

Since the beginning of the year, the Toronto market has lost about one-third of its value, more than $600 billion, diminishing the value of stocks held by millions of Canadians either directly or through mutual funds and pension plans (cash loan).

If ordinary Canadians are suddenly feeling poorer because of the market meltdown, analysts warn, that could tighten their pursetrings and generate a bigger spending fallout on the retail sector and broader economy.

Marti Messam, a Vancouver-area insurance broker, said today’s market drop worries her, but she believes it’s part of a down cycle that will eventually recover.

“I am concerned, clearly, but probably it will pass,” Messam said while walking to her office in Vancouver. “It will be interesting to see how it plays out in the U.S. I think our economy is much stronger than the American economy.”

Messam said “the unsteady American economy has put off her decision to buy a home in Palm Springs, Calif.

Vancouver lawyer Ed Mortimer called the stock market plunge and the current economic outlook are “very serious.”

“It’s the domino effect,” said Mortimer, while sipping a coffee and doing a crossword puzzle at a Vancouver cafe today. “We are going to be in the same soup as the U.S., although perhaps not as extreme.”

On the markets, investors were initially cheered by the Bush administration’s US$700 billion rescue plan last week, but grew skeptical that the bailout will work quickly to unfreeze the credit markets.

Global banks, hobbled by wrong-way bets on mortgage securities, still remain starved for cash and refuse to lend to each other. As well, credit has dried up and there’s little lending to businesses for job creating expansions and to consumers to buy cars or finance other big-ticket purchases.

“These programs are going to be effective, I believe,” said Rob Lutts, chief investment officer at Cabot Money Management. “Shorter term, we’re in a very challenging environment that’s going to take a while.”

Fears about a global recession caused oil to drop more than $6 to US$87.81 a barrel, its lowest point in eight months. Meanwhile, the benchmark index that gauges fear in the stock market jumped to the highest level in its 18-year history.

Market sentiment also plunged today in Russia, South America and Asia after governments across Europe rushed on the weekend to prop up shaky banks to get them lending again.

More global interest rate cuts could also be on the way, co-ordinated by the world’s central banks, including the Bank of Canada.

The economy has become the key issue on the campaign for the Oct. 14 federal election, with the opposition parties hammering the Conservative government for what they say is a laissez-faire approach to economic management.

Prime Minister Stephen Harper says that while Canada is not immune to the troubles in global financial markets, the Canadian economy is fundamentally sound and has been helped with Tory tax cuts and other policies.

“Let’s be clear: the prime minister of Canada isn’t going to go around the country predicting a recession when we’re not in a recession now,” ’ Harper said while campaigning in Ottawa early Monday.

“I remain fundamentally optimistic about the Canadian economy, but optimistic, as I’ve said from the beginning, within the framework that we’re now living in … a period of economic uncertainty.”

Harper added: “We’re in relatively good position compared to some other countries.”

At first glance, Canada appears in much better shape today than during the recession of the early 1980s — the worst since the Second World War — when the Canadian jobless rate peaked at 13 per cent.

Economists expect 12,500 new jobs were created in September, down slightly from the 15,200 jobs created in August. For the first eight months of the year the Canadian economy has created 87,000 jobs compared with 221,000 in the first eight months of 2007.

Canada’s jobless rate, currently stands at 6.1 per cent, close to its lowest level in three decades, though economists expect it to rise to 6.2 per cent for September when the latest jobs report is released Friday.

Harper said the main problem afflicting the world economies is the freezing up of bank credit, which has hurt companies and consumers looking for loans.

“Our main advice is obviously to encourage co-ordinated action, to encourage actions that will stabilize the situation without creating a great deal of moral hazard for taxpayers,” the prime minister said. said.

Sourse

WASHINGTON–U.S. banking regulators said yesterday they will seek to resolve rival acquisition proposals by Citigroup Inc. and Wells Fargo & Co. for Wachovia Corp.

In a surprise announcement, Wells Fargo agreed to buy Wachovia for $15.1 billion (U.S.), four days after Citi agreed to acquire Wachovia’s banking operations in a government-backed deal that involved the Treasury Department and the Federal Reserve.

The Federal Deposit Insurance Corp. announced a shotgun merger proposal between Citi and Wachovia on Monday, with the FDIC agreeing to absorb up to $42 billion in losses should Wachovia’s $312 billion pool of loans later turn sour.

The deal, reached in consultation with President George W. Bush, also allowed the FDIC to receive $12 billion in preferred stock and warrants from Citi for taking on possible future risks.

A deal with Wells Fargo, if consummated, could wipe out potential risks to the government and taxpayers that a government-approved Citi deal would include. Citi said yesterday it has an exclusivity agreement with Wachovia.

The FDIC said it stood by the Citi deal, but at the same time left open the possibility of accepting Wells Fargo’s proposal after reviewing it.

It was not immediately known if FDIC chair Sheila Bair or her agency participated in the negotiations between Wells Fargo and Wachovia, but Bair said the new offer "does not require FDIC assistance (instant payday loan)."

In a separate statement, she said her agency stands behind the agreement with Citi.

In a joint statement, the Fed and the Office of the Comptroller of the Currency said they had not yet reviewed the new Wells Fargo proposal, but had reviewed Citi’s bid extensively. "The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability," they said. The central bank regulates bank holding companies, and the OCC is the primary regulator for the banking units of Wachovia, Citi and Wells Fargo.

The FDIC, which insures bank deposits, has tried to match potentially failing banks with buyers in an effort to stave off harm to the deposit insurance fund, which stood at about $45 billion three months ago.

Bair said the FDIC will work with all three for a resolution that "serves the public interest."

Sourse

U.S. factory orders tumbled in August and the number of workers seeking jobless benefits rose in the latest week to a seven-year high as trauma in financial markets threatened to accelerate a deep downturn in the world’s largest economy.

Thursday’s reports were just the latest in a series of grim economic news, and follow Wednesday’s data showing factory activity shrank in September to its lowest level since the 2001 recession, according to the Institute for Supply Management.

“You add it all up, with the jobless claims and yesterday’s ISM, and it’s pretty damn clear we’re in a recession,” said Robert Macintosh, chief economist at Eaton Vance Corp in Boston.

The data heightened anxiety in financial markets, sending stocks sharply lower as investors feared the economy was increasingly vulnerable to the multiple blows this year from high energy prices and severe constraints on credit.

The number of people filing initial claims for jobless benefits was 497,000 in the week ended Saturday, the highest since the weeks following the September 11, 2001 attacks, the Labor Department said in a weekly report http://savingpaydayloans.com. Wall Street economists’ had forecasts 475,000 initial claims.

The Labor Department estimated that the effects of Hurricane Gustav in Louisiana and Hurricane Ike in Texas added approximately 45,000 claims to the total.

Even without that, claims would have been well above the level of 400,000 that many economists associate with a recession.

Weekly claims are one of the most up-to-date indicators, and the bad news is that even they probably do not fully reflect the effects of the heightened credit turmoil of recent weeks. 

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Volvo Group is shutting down its Goderich road grader operations and eliminating about 500 jobs as consolidations and closures continue hammering Ontario’s manufacturing sector.

Volvo Construction Equipment, a subsidiary of the giant industrial Swedish parent, yesterday said it will gradually move most of the grader work to another plant in Shippensburg, Pa., by 2010.

As part of the move, the company added it will close and relocate a parts warehouse in the town on the eastern shore of Lake Huron to another site in Columbus, Ohio.

Volvo, which no longer has any corporate ties to automaker Volvo Car Corp., said in a statement that the company decided on the moves to improve competitiveness and profitability of its road machinery business and reduce exposure to fluctuations in North American currencies.

The decision surprised union officials and workers in this community of about 7,000, where Volvo is one of the two biggest employers.

"There was no inkling that this was coming," said Jim Nugent, a local staff representative for the International Association of Machinists. "There has been some down time because the overall road machinery industry is down a bit. Local management was even talking to us a few months ago about making an investment."

Nugent noted the closure will also ripple through the region’s economy and eliminate hundreds of other jobs at businesses that supply parts and services to Volvo.

"I can’t imagine a company of this size shutting down without having an effect on a lot of other people around here," he said.

The plant, which makes some parts and assembles graders, traces its roots to the 1950s when a couple of local entrepreneurs started Champion Road Machinery http://us-fast-cash-now.com. Volvo bought it out in the late 1990s.

Nugent, whose union represents about 450 employees, said Volvo did not approach it about finding ways to make the plant more competitive such as changes in work rules. Employees currently earn an average of about $25 an hour.

A Volvo spokesperson could not be reached for comment.

The announcement reflects an increasing trend that has seen manufacturers closing plants in Ontario or shifting production to the U.S. or other countries.

In the last month, Deere & Co. revealed it would close a major farm equipment plant in Welland and transfer production to the U.S. The move will eliminate 800 jobs.

And Simmons Canada abruptly shut down its mattress factory in Brampton during a strike and transferred most of the output to two U.S. operations. It wiped out about 150 jobs.

Statistics show the province has lost more than 200,000 manufacturing jobs in the past five years and economists say the carnage will continue because of a high dollar, increasing energy and material costs, and stiffer offshore competition.

Union leaders say politicians in the current federal election campaign have not offered viable proposals to address the problem even though a recent poll for the Canadian Auto Workers union found most respondents think the federal government has a responsibility to implement development strategies for various sectors.

Volvo also said it is reducing output at three truck operations in Europe because of falling demand. It is cutting 400 jobs in Ghent, Belgium, and another 980 in Gothenburg and Umea, Sweden.

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