OTTAWA — Fear gripped financial markets on Monday as the fallout of a downgrade of America’s credit worthiness crushed stocks and investors seeking safety sent gold to a record high.
Scotiabank economist Derek Holt said the turmoil on financial markets will help prompt the Bank of Canada to keep its overnight rate target on hold at just one per cent until the second quarter of next year at least.
“Any talk of the Bank of Canada hiking this year is just foolish in my opinion,” Holt said from Toronto.
“The extent of the global shocks that we’re going through combined with disappointing domestic growth and a very dovish recent inflation figure gives the bank an awful lot of wiggle room.”
The Toronto stock market and the Dow Jones industrials average both lost nearly 500 points in afternoon trading, while gold closed at a record high of more than US$1,700 an ounce higher as investors looked for shelter in a rout that was sparked by Standard & Poor’s first ever downgrade of America’s credit rating.
The downgrade wasn’t unexpected, but investors were already jittery about the weak U.S. economy, European debt problems and Japan’s recovery from its March earthquake and tsunami.
G20 finance ministers and central bank governors said Monday they’re ready to step in and ensure financial stability as the latest wave of global economic fear gripped investors.
The group issued a statement affirming their commitment “to take all necessary initiatives in a co-ordinated way to support financial stability and to foster stronger economic growth.”
“We will remain in close contact throughout the coming weeks and co-operate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets.”
“Moreover, we will continue to work intensively to achieve concrete results in support of strong, sustainable and balanced growth in the context of the G20 Framework for Growth.”
BMO chief economist Sherry Cooper agreed with Holt that the Bank of Canada would likely not raise rates this fall as some had predicted.
“No one is talking about that any longer,” she said. “Right now the markets are building in a cut by the Bank of Canada.”
Cooper said the commodity-heavy Toronto market has underperformed in recent weeks and the bank stocks were also lower even though the institutions themselves remain strong.
“This is similar to what we saw during the financial crisis in 2008 which is very troubling given that our domestic situation is among the best in the world as we really are truly a triple-A economy,” she said.
Cooper said she hoped the decline in gasoline and food prices would spur consumer spending in the U.S.
“If we don’t get a rebound in the U.S. economy then we could well see a significant slowdown in Canada,” Cooper said.
Gold gained $61.80, or more than three per cent, to close at US$1,713.20, after peaking earlier at a record high of $1,718.20, while the Canadian dollar tumbled nearly a full cent as nervous investors piled into U.S. Treasurys and precious metals. The loonie lost 1.45 cents to 100.79 cents U.S.
On energy markets, fears of an economic slowdown caused by the debt crisis dragged the price of oil down $5.88 to US$81 a barrel after falling $8 last week.
The debt woes in Greece are now also threatening to engulf Italy and Spain and have sharpened fears that a fragile global recovery could easily derail.
Finance Minister Jim Flaherty said he was confident governments have agreed to take the appropriate actions to ensure ongoing global financial stability and growth after a conference call Sunday with G7 members.
G7 members issued a joint statement pledging increased co-operation to attack economic problems and prevent a market meltdown.
The European Central Bank later said it would “actively implement” a bond-purchase program to boost Spanish and Italian bonds and drive down interest yields that threaten those countries with financial disaster.