Nikkei index DROP Rattles tsx, dow

Toronto and U.S. stock markets racked up losses Thursday amid a contraction in Chinese manufacturing that drove Tokyo’s Nikkei index down to levels not seen in more than two years.

The S&P/TSX composite index fell 94.14 points to 12,658.09, while the Canadian dollar rose 0.73¢ to US97.14 ¢.

On Wall Street, the Dow Jones industrials fell 12.67 points to 15,294.50, the S&P 500 was down 4.84 points at 1,650.51 and the Nasdaq dipped 3.88 points to 3,459.42.

The 7.3% slide in the Nikkei to 14,483.93, which was also partly blamed on a spike in Japanese government bond yields, amounted to the biggest drop for the index since Japan was hit by a devastating earthquake and tsunami more than two years ago.

The Nikkei has been the best- performing major index this year, having risen around 45% to five-year highs before Thursday’s drop. The index has been buoyed by the announcement of aggressive monetary stimulus by the Bank of Japan, which has piled pressure on the yen.

The drop could be seen as a sign that investors are getting nervous that Japan’s plan to try to end two decades of stagnation may not be working, said John Tsagarelis, a portfolio manager at Manulife Asset Management.

“We’ve had a tremendous rally, not so much on fundamentals but on expectations,” he said. “I think we’ll probably be taking breathers over the next couple of weeks because the markets have moved so aggressively, especially in Japan.”

The weakness in markets could also be fallout from mixed messages from U.S. Federal Reserve chairman Ben Bernanke on Wednesday.

Bernanke told the U.S. Congress that the Fed has no plans to end its US$85-billion a month in bond purchases. But, when pressed, he said the Fed would consider stopping the program as early as Labour Day if the economy shows significant signs of improvement.

Minutes of the Fed’s April 30 to May 1 monetary meeting, released following Bernanke’s speech, showed that some officials had considered slowing the asset purchases as early as June.

Tsagarelis said investors had been predicting that quantitative easing would continue until at least January or February, 2014. Either way, it was no surprise that the stimulus will eventually run out.

“The math must lead them (the Fed) to consider removing quantitative easing sooner rather than later because they are just owning too much of the bond market, the treasury market and the MBS (mortgage-backed security) market in the United States,” he said.