Stock markets back off, U.S. Treasury warns of dire scenario about debt ceiling

Photo: The Canadian Press. All rights reserved.

A tote board TSX numbers in Toronto, on Dec.31, 2012. THE CANADIAN PRESS/Frank Gunn

TORONTO - The Toronto stock market racked up another round of losses Thursday, reflecting increased volatility arising from worries that the United States could be heading for a big economic shock later this month.

The S&P/TSX composite index dropped 103.88 points to 12,735.12 and now has lost ground in three of the last four sessions, while the Canadian dollar was ahead 0.05 of a cent to 96.84 cents US amid widespread U.S. dollar weakness.

The slide came as a partial U.S. government shutdown moved into a third day with no signs of an end, raising worries that the budget impasse over government funding will collide with the Oct. 17 deadline when the U.S. hits its debt limit. At that time, the government will start to run out of cash and could default on its debts.

U.S. indexes also racked up losses as the U.S. Treasury Department warned Thursday that the economy could plunge into a downturn worse than the Great Recession five years ago if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations.

The Treasury’s report says a default could cause the U.S. credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket.

The Dow Jones industrials fell 136.66 points to 14,996.48, the Nasdaq was 40.68 points lower at 3,774.34 and the S&P 500 index gave back 15.21 points to 1,678.66.

"It’s a really tricky situation and this could drag on a lot further," said Gareth Watson, vice-president investment management and research, at Richardson GMP Ltd.

"The way the right is spinning this shutdown right now is that it is just a mere shutdown of a few national parks, it’s not a big deal. And yeah, the first day is not a big deal, the second day is maybe more of a deal but not a big deal but once you get to the next week, I think tempers will start to flare."

Hopes had been high earlier in the week that Republicans and Democrats would come to a last-minute agreement prior to midnight Monday to avoid the shutdown, and then that the withdrawal of some services would be short-lived.

At issue is the Affordable Health Care Act, or Obamacare, which the Republicans oppose.

Republican House Speaker John Boehner has said that curbing the health-care overhaul that President Barack Obama pushed into law three years ago remains part of the price for ending the shutdown. Traders are concerned that price tag will also apply to raising the debt ceiling.

Meanwhile, The New York Times reported that Boehner had told his party that he's determined to prevent a federal default and is willing to pass a bill raising the debt limit with both Republican and Democratic votes.

The metals and mining sector led decliners, down 2.62 per cent as December copper lost five cents to US$3.27 a pound. First Quantum Minerals (TSX:FM) ticked 76 cents lower to C$17.85.

The tech sector also weighed on the TSX with BlackBerry (TSX:BB) down 30 cents, or 3.63 per cent, to $7.97. BlackBerry says its latest device will arrive in Canada later this month, but it won't have the full support of Rogers Communications (TSX:RCI.B), which has decided not to stock the new device.

The industrials group was down 0.8 per cent as Canadian Pacific Railway (TSX:CP) fell 98 cents to $128.78.

Telecoms also weighed with BCE Inc. (TSX:BCE) down 41 cents to $43.51.

The energy group was down 1.12 per cent as November crude on the New York Mercantile Exchange was down 79 cents to US$103.31 a barrel. Canadian Natural Resources (TSX:CNQ) lost 45 cents to C$31.78.

The gold sector was off about 1.4 per cent as December bullion faded $3.10 to US$1,317.60 an ounce. Barrick Gold (TSX:ABX) was down 35 cents to C$18.67.

In other corporate news, Valeant Pharmaceuticals International Inc. (TSX:VRX) was ahead $1.53 to $114.91 after it said the U.S. Food and Drug Administration has approved a new Bausch + Lomb disposable contact lens sooner than expected. Bausch + Lomb was acquired by Valeant for about US$8.7 billion in August.