Late-day selloff sinks TSX
STEVE LADURANTAYE
Globe and Mail Update
October 27, 2008
A late-day selloff in financial, energy and mining stocks pushed the S&P/TSX to a deep loss Monday, even as commodities recovered from earlier losses.
The S&P/TSX tumbled 8.1 per cent, or 756.75 points, to 8,537.34 points, its lowest close in four years. Manulife Financial, which may need to raise capital to appease regulators, led the downward charge with a loss of 15.3 per cent.
The financial subindex lost 8.47 per cent, energy was down 7.19 per cent and miners lost 7.2 per cent. The sectors are the three heavily weighted components of the S&P/TSX.
The Dow Jones industrial average lost 2.4 per cent, or 203.18 points, to 8,175.77. The S&P 500 lost 3.17 per cent, or 27.85 points, to 848.92.
“Investors continue to wonder how badly the recession will affect earnings,” Citigroup's chief equity strategist Tobias Levkovich commented. “While the reality of profit weakness is well understood by investors now, the most significant uncertainty rests on the extent of the deterioration, given a broadening array of possible sources of disappointment.”
Oil dropped as low as $61.30 a barrel, but then regained some ground to close at $63.22 on the New York Mercantile Exchange, a loss of 93 cents. Gold rose to $742.90 on the Nymex, up $12.60.
One reason the markets are continuing their precipitous declines despite hundreds of billions of dollars in government intervention to prop up financial institutions is the unwinding of the yen carry trade, said Scotia Capital analyst Vincent Delisle.
In a carry trade, investors borrow Japanese yen and then invest in foreign markets, to take advantage of interest rate spreads. As the yen gains on the U.S. dollar and the spreads tighten, investors are selling those holdings and converting back to yen to minimize losses.
“For many years, selling yen (at near zero rates) and reinvesting elsewhere (at much higher rates) provided liquidity to investors who then cheerfully climbed up the risk curve,” he wrote in a morning strategy note. “Now that major central banks are cutting their benchmark rates, thus narrowing the spreads with Japan's 0.5 per cent rate, this virtuous circle is unfolding.”
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