European debt fears batter TSX

Fears that the effects of a government debt crisis could push Europe into a severe economic downturn sent the Toronto stock market tumbling Monday.

The S&P /TSX composite index dropped 201.97 points to 11,813 in a broad-based selloff. The TSX Venture Exchange was down 38.44 points at 1,554.67.

“The theme really comes back to the credit crisis — even though solutions have been put forward and implemented they are still, it seems, to be a stop-gap measure,” said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier.

“And to get full resolution to these issues probably means more severe government austerity programs.”

The U.S. dollar was higher as investors moved into the perceived safe haven status of the greenback, which in turn pushed the euro to a four-year low of US$1.2233. It later recovered to US$1.2382. The Canadian dollar also lost ground, falling 0.19 of a cent to 96.74 cents US.

Oil prices were again lower after the strengthening U.S. currency and signs of rising supplies pushed crude down almost five per cent last week. Oil, which is priced in U.S. dollars, becomes more expensive to investors holding other currencies when the greenback advances.

The June contract on the New York Mercantile Exchange was off $1.53 at US$70.08 a barrel after going below the US$69 level late in the morning for the first time since February. Oil prices have plunged 20 per cent in the past two weeks.

The TSX energy sector was down two per cent as Canadian Natural Resources (TSX:CNQ) fell $1.23 to C$71.37 while Suncor Energy (TSX:SU) lost 80 cents to C$31.26.

The base metals sector was down 5.8 per cent as the July copper contract on the Nymex lost ground for a second day, down 20 cents to US$2.93 a pound as concern over growth in China also depressed metal prices.

China’s premier, Wen Jiabao, has emphasized the need to control surging housed prices, which in turn has again sparked concern the government could tighten lending and slow the Chinese economy.

A strong Asian rebound has helped the global economy start to recover from recession and, in particular, has boosted commodity prices and oil and mining stocks on the TSX.

Teck Resources (TSX:TCK.B) declined $2.23 to C$33.11 while HudBay Minerals (TSX:HBM) fell 36 cents to C$10.92.

Gold prices were slightly higher but well off the record levels hit late last week on worries about the viability of the euro. The June bullion contract in New York was ahead 30 cents to US$1,228.10 an ounce after hitting an intraday high of US$1,249.70 Friday. However, gold stocks also sold off and Barrick Gold Corp. (TSX:ABX) faded $1.21 to C$45.87 while Kinross Gold Corp. (TSX:K) shed 57 cents to C$19.

The industrials sector stepped back 1.67 per cent with Bombardier Inc. (TSX:BBD.B) down 18 cents at $5.21 while Canadian National Railways (TSX:CNR) declined 55 cents to $60.73.

Financials were also a drag with Scotiabank (TSX:BNS) down $1.39 to $50.94.

Markets have been volatile for weeks, initially on worries that Greece would find itself effectively frozen out of bond markets as their huge budget deficits would result in traders demanding huge premiums to roll over debt.

Those fears were temporarily put on hold a week ago following the unveiling of a massive US$1-trillion bailout program a week ago which would give European countries facing mounting debt problems access to cheap loans.

But some traders feel that the package might not be big enough. German Chancellor Angela Merkel conceded over the weekend that the package was no more than a Band-Aid solution to the problems afflicting a number of eurozone countries.

Investors are also concerned that tough austerity measures taken by countries such as Greece, Portugal and Spain could drive Europe into recession.

New York indexes shook off early losses to close little changed as investors looking for signs of an improving domestic economy received mixed data.

The Dow Jones industrial average came back from a 184-point slide to close up 5.67 points at 10,625.83 as home-improvement retailer Lowe’s reported a better-than-expected first-quarter profit and raised its guidance for the year. But the outlook was shy of analysts’ expectations, which sent its shares down 81 cents to US$25.26.

The Empire State manufacturing index also disappointed traders. The index, which measures manufacturing activity in the New York region, plummeted to 19.11 this month from 31.86 in April. Economists polled by Thomson Reuters, on average, had forecast a reading of 30.00 for May.

The Nasdaq composite index moved 7.38 points higher to 2,354.23 while the S&P 500 index was up 1.26 points at 1,136.94.

In other corporate news, TD Bank Financial Group Inc. (TSX:TD) said it is expanding its presence in the U.S. Southeast by buying South Financial Group, Inc. (Nasdaq:TSFG) for a total of US$191.6 million. South Financial has incurred more than US$1.3 billion in losses since the beginning of 2008, primarily as a result of loan charges associated with real estate loans and mortgages. TD shares were off $1.41 at $71.98.

Zarlink Semiconductor (TSX:ZL) announced the sale of its optical products group to Tyco Electronics (NYSE:TEL) for US$15 million in cash. The Ottawa-based company said it will now target growth initiatives in the network timing, medical wireless and line circuit markets and its shares dipped three cents to $1.51.

CAE (TSX:CAE) shares rose four cents to $9.60. The company said Monday that Lockheed Martin has awarded the flight simulator and training company a $90-million contract to provide aircraft maintenance training for Canada’s new fleet of 17 CC-130J Hercules transport aircraft.

Builder Churchill Corp. (TSX:CUQ) says it will about double in size through a friendly deal to acquire Seacliff Construction Corp. of Richmond, B.C., (TSX:SDC) for $390-million. Churchill shares were down 74 cents at $18.22, but Seacliff shares jumped $2.46 or 16.9 per cent to $17.01.

Goldcorp Inc. (TSX:G) said it has received a final human rights assessment report on its Marlin mine in Guatemala and will issue a response and action plan once it has reviewed the report. The International Labour Organization called in March for the suspension of mining activity at Marlin due to alleged human rights violations. Goldcorp shares were down 89 cents at $46.25.