Emerging markets put a chill on tsx

TORONTO • The Toronto stock market plunged more than 200 points Friday as emerging market worries persuaded investors to avoid riskier assets like equities and commodities. The S&P/TSX composite index dropped 215.21 points to 13,717.76 in a broad-based sell-off.

The Canadian dollar was ahead US0.21¢ to US90.31¢ as Statistics Canada said the annual inflation rate rose to 1.2% in December, compared with 0.9% in November, largely because of higher gasoline prices.

Losses were even steeper in New York where the Dow Jones industrial average racked up a sizable triple-digit loss for a second day, falling 318.24 points to 15,879.11 after plunging 176 points on Thursday. Nasdaq was 90.7 points lower to 4,128.17 while the S&P 500 index was down 38.17 points to 1,790.29.

Investors have been worried about sharp drops in the values of currencies in several emerging markets, including Turkey, Russia, South Africa and Argentina.

These drops were sparked by moves by the U.S. Federal Reserve to cut back on its massive bond purchases, a key stimulus measure that fuelled a rally on stock markets last year and also kept long-term rates low. But U.S. bond yields have risen as the Fed moves to taper its purchases.

“If the expectation is in the U.S. that yields start going up, I think the investors who are now overseas in the Turkish, Argentinian, South African or Venezuelan bond markets don’t see the need to stay there anymore — so they repatriate their money,” said John Tsagarelis, portfolio manager at Manulife Asset Management.

The rout in emerging market assets began a day earlier following signs that manufacturing was contracting in China, a major driver of global economic growth.

Also weighing on markets has been a slew of fourth-quarter earnings reports out this week that have disappointed on revenue growth. Investors are wary of a U.S. market that hasn’t experienced a serious correction in almost 18 months. The S&P 500 soared about 30% last year.

Much of last year’s rally was made possible by Fed stimulus in the form of massive bond buying. But the central bank announced last month it was cutting those purchases by US$10-billion a month to US$75-billion.

The Fed holds its next interest rate meeting next week and traders will be anxious to see if the Fed reduces its asset purchases further.

North American indexes fell sharply during the week with the TSX down 1.23% while the Dow gave back 3.52%.

The industrial group led decliners on Friday, down 2.55%, and the base metals sector was close behind, down 1.98% as March copper declined US1¢ to US$3.278 a pound following a US5¢ retreat Thursday on the China manufacturing data. Financials were also a weight, down 1.61%.

The energy sector lost 1.38% with the March crude oil contract down US68¢ to US$96.64 a barrel. The February gold bullion contract rose US$2 to US$1,264.30 an ounce as the gold sector lost early momentum and turned down about 0.7%.