Canadian stocks stumbled on Friday to their lowest level in more than a week as speculation that Standard & Poor's would downgrade credit ratings on several eurozone countries pressured commodities and other risky assets. All of Toronto's 10 main sectors were down, led by dominant resource and financial issues, though the market managed to mostly recover from earlier lows.
The Toronto Stock Exchange's S&P/TSX composite index ended down 43.26 points, or 0.35 percent, at 12,231.06. It hit a session low of 12,116.98, its lowest level since January 3. The TSX was up 0.3 percent for the week and ahead 2.3 percent since the start of the year.
Markets were rattled by reports that S&P was set to downgrade some eurozone countries, including France and Austria, but leave the ratings of Germany and the Netherlands unchanged. French Finance Minister Francois Baroin said his country has been notified of a one-notch cut. "I think the market has handled this very well," said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.
"People are getting more confident that, one, the US economy continues to expand, it's not going to go into a recession. And two, that the problems in Europe are unlikely to have a contagion effect outside of Europe." Among the heaviest decliners, Royal Bank of Canada lost 1.3 percent to C$52.09 and Canadian Natural Resources slipped 1.2 percent to C$37.91.
"(The downgrades) should not be a surprise to anyone, given the continuing deterioration of financial ratios amongst virtually everybody in the European Union," said Gavin Graham, president at Graham Investment Strategy. "It's a reality check." In December, S&P placed the ratings of 15 euro zone countries on credit watch negative and said "systemic stresses" were building up as credit conditions tighten in the 17-nation bloc.
A broad European downgrade would have a significant impact on imports to the region and on growth-reliant stocks, particularly those listed on Canada's commodities-heavy index. Even before the downgrade speculation, sentiment was hit by a tepid reaction to Italy's first big bond auction of 2012, as the EU's third-largest economy raised less than half the 10 billion euros secured the previous day at far lower yields by Spain.
Both countries have benefited from half a trillion euros of cheap three-year funds the European Central Bank injected into the banking system last month. Losses on the TSX were curbed by more signs of North American economic strength as data on Friday showed US consumer sentiment hit an eight-month high in early January as Americans grew more optimistic about job prospects.
"At the end of the day, the US is still the consumer of the world and if they feel good about themselves and are a lot more likely to spend, the whole world benefits," said Nakamoto. The divergence between Europe's debt crisis and relatively solid US economic data has frustrated investors' attempts to assess how much risk to take on in the market.
The weakening global economic performance is expected to be fully reflected in the corporate earnings reports due out on both sides of the Atlantic in coming weeks, but so too will be the growing distinction between the two regions. In individual company news, Canadian National Railway was down 1.3 percent at C$78.25 after CN asked ex-CEO Hunter Harrison to reconsider the idea of taking over as chief executive at rival Canadian Pacific, which rose nearly 1 percent to C$70.77.
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