TORONTO - The Toronto stock market could be in for more stomach-churning volatility this week as investors weigh whether the U.S. is slipping towards another recession and try to regain a commodity that went AWOL from markets last week: confidence.
It practically evaporated last week as the European debt crisis worsened with Italy's borrowing costs surging, highlighting just how vulnerable the eurozone is and how insufficient its anti-crisis measures are.
And then on Friday night, Standard & Poor's said it is downgrading the United States' credit rating in an unprecedented move. It said it's cutting the country's top AAA rating by one notch to AA-plus.
S&P said it is making the move because the deficit reduction plan passed by Congress earlier in the week did not go far enough to stabilize the country's debt situation.
The bitter, partisan wrangling over raising the U.S. debt ceiling had already taken a toll on investor sentiment as U.S. lawmakers came to an agreement that nobody seemed to really like just before an Aug. 2 deadline expired.
"I just think what happened here is the fiasco in Washington last week got the ball rolling, got people nervous and selling and it's fed on itself," said Doug Porter, deputy chief economist at BMO Capital Markets.
"They unleashed a series of events that is beyond what they can control now."
But 11th hour rescues, such as the debt ceiling agreement and the announcement of a second bailout for Greece at the end of July that didn't solve anything in the long term have stretched investor patience to the breaking point. And other analysts suggest that is another reason why investors have chosen to sell off in this market.
"We think at the end of the day that people always will do what's necessary to fix things," said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough, Ont.
The TSX had a dreadful week, losing 783 points or six per cent, despite an American employment report on Friday showing a better than expected 117,000 jobs were created during July. The showing left the TSX down almost 10 per cent this year -- a loss of many tens of billions of dollars of market value.
But this isn't a time for panic and Pyle cautioned investors against drawing parallels with the fall of 2008 when stock markets plunged thousands of points.
For one thing, he pointed out that we aren't in a credit crisis partly triggered by the fall of investment bank Lehman Bros.
Pyle pointed out that "corporations in the U.S. are sitting on $2 trillion in cash and if anyone goes to the market today with a bond issue, it gets lapped up. There's plenty of demand out there for commercial paper (short term, unsecured debt instruments issued by corporations), where in 2007, you wouldn't touch paper."
And as with many negative stories, there is a positive side to the extreme volatility seen in markets recently.
A big reason why investor fear over the U.S. economy increased was poor economic performance in the first half of the year, in what was originally thought to be a soft patch for the economy.
Poor growth numbers were caused in large part by a tremendous surge in oil and gasoline prices when unrest was spreading across the Mideast in February and March. Oil rose almost to the US$115 level in short order. But now those prices are retreating quickly, with crude down to around US$85 at the end of last week.
"So that drain on household budgets fades, and gasoline prices are fading too, and lo and behold mortgage rates in the US dropped to eight month lows again," said Pyle.
"So if we have those two things happening going into the end of the third quarter, is that enough to rejuvenate demand?"
After a two week run of big losses, investors can only hope that the jobs report from Friday provides a reason to at least take a paused and regroup.
"It's a big feat in itself just to get somebody to step back and think about this and what we saw last week was more of a panic based unloading of risk," he said.
"It was almost like, what they told me back in the spring was right, this market is going to fall and I'm just going to sell into it. So, first things first, you have to get individuals to step back just to even think about this let alone entertain the fact of getting back in."
