Fears of Greek debt default send TSX, Dow plummeting

North American stock markets took a gut-wrenching nosedive for a few minutes Thursday afternoon, jittery traders dumping commodity-related shares in a hurry as wild fears shot through the investing community that European debt problems could derail the global recovery.

North American stock markets took a gut-wrenching nosedive for a few minutes Thursday afternoon, jittery traders dumping commodity-related shares in a hurry as wild fears shot through the investing community that European debt problems could derail the global recovery.

Toronto’s S&P/TSX composite index went into freefall for about five minutes at mid-afternoon, plunging more than 450 points or more than three per cent. It quickly reversed direction, climbing back to level off just 144 points in the red at 11,730.71.

The slide was even more pronounced in New York, where The Dow Jones industrials dropped almost 1,000 points before recovering to a loss of 465.

Meanwhile, currencies like the Canadian and Australian dollars got hammered on financial markets as investors rushed to the safe havens of the U.S. greenback and gold.

“It’s like the breaking of the floodgates,” said Colin Ceiszynski, market analyst at Toronto-based CMC Markets.

“We had a lot of this negative news growing in the markets for months now, this Greek situation and other things. And the markets have been defying gravity, they have kept on going up on the hope of improved corporate earnings and everything and we got to a point of exhaustion.”

Thursday’s sudden drop was a painful reminder of the volatile market swings during the 2008 Wall Street financial crisis that sparked the recession and was affected by computer programs that intensified the selling pressure.

The skittishness on stock markets underscores a deep-rooted nervousness in the global financial community, which is watching the Greek situation closely. The big worry is that the Greek government won’t be able to impose austerity measures to get financial help from its peers in the European Union, will default on its loans and touch off a cascade of debt failures in other countries such as Portugal and Spain.

Should that happen, Europe would again be plunged into economic mayhem — once again undercutting demand for oil, metals and all of the other materials that go into manufacturing.

“The market is now realizing that Greece is going to go through a depression over the next couple of years,” said Peter Boockvar, equity strategist at Wall Street’s Miller Tabak brokerage. “Europe is a major trading partner of ours, and this threatens the entire global growth story.”

Lower growth in Europe is a big problem for the Toronto stock market, which is heavily weighted in oil stocks and is considered one of the world’s premier trading boards for companies that produce primary metals such as nickel and iron.

Commodity stocks and currencies have already suffered this week as investors lose faith in the euro and pile into the safe haven status of the U.S. dollar.

The Canadian dollar also dropped like a stone, because demand for the U.S. greenback rises whenever there is global tension as many currency traders see it as a rock-solid “safe haven” in which to park their investment cash.

The loonie tumbled more than three cents in mid-day trading then also recovered. It was the third straight day of losses for the loonie, this time doubling the losses of the previous two sessions, dropping the currency to 93.95 cents US — far below its perch near parity, reached in April.

The Canadian currency later traded at 94.84 cents US, a drop of nearly 2.3 US cents.

Because the loonie too is linked to commodity prices, when they get sideswiped, so does the dollar, observed Scotia Capital currency strategist Camilla Sutton.

“It’s just the market together buying U.S. dollar, and quickly getting rid of their portfolios of risk,” she said.

But longer term, she adds that the fundamentals still favour the loonie appreciating against the American greenback.

Australia is down an equivalent amount to the loonie, while the yen is up about four per cent, and gold rose $23.10 to $1,190.90 an ounce.

Sutton says the Canadian currency could fall even further in the short term.