The Toronto stock market plunged 400 points Tuesday over disappointing earnings news, big drops in energy and financial sectors and hints of higher interest rates while the Canadian dollar surged following a strong retail sales report.
The TSX dropped 400.17 points or 2.75 per cent to 14,068 on Tuesday -- the biggest one-day point-drop since February 2001.
The drop was also the sixth biggest on record at the TSX, just short of a 407-point drop in October 1987 when the index stood at about 3,200.
One observer said the hot market was overdue for "some sort of correction."
"It went too high too quickly but the fundamentals are still strong and we're giving some back," Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier, told the Canadian Press.
The losses were led by the energy sector, down almost four per cent as the September crude contract on the New York Mercantile Exchange dropped US$1.33 to US$73.56.
The financial sector also fell, dropping 1.8 per cent after a strong May retail sales report raised concerns that the Bank of Canada would hike interest rates at least two more times this year.
Concern over rising interest rates helped drive up the Canadian dollar's value.
The loonie made another significant gain on Tuesday, closing at 96.36 cents US -- the first time it has closed that high since early 1977.
The currency rose 0.85 cents US on Tuesday, pushed higher by the release of the blowout May retail sales report.
reported that retail sales jumped 2.8 per cent in May
This was the best showing in a decade and far above the modest 0.4 per cent rise that economists were forecasting.
Excluding the auto sector, sales jumped 2.3 per cent. Retail sales saw gains in every province and territory and Quebec led the way with an increase of 4.9 per cent.
"This massive gain confirms that the Canadian consumer is on a roll, backstopping evidence from soaring home and auto sales," said BMO Nesbitt Burns chief economist Doug Porter.
"Perhaps most notably, the gains are fanning out from Alberta, with almost all provinces posting impressive growth. This clearly puts additional Bank of Canada tightening in play, above and beyond a second quarter-point rate hike in September."
Other analysts also expect higher interest rates.
"The strong growth momentum evident in the first half of the year and elevated level of core inflation support the case for the Bank of Canada to continue to boost interest rates," said Dawn Desjardins, senior economist at RBC Capital Markets.
Desjardins forecasts that the central bank's overnight rate will hit five per cent by the end of the year, from its current rate of 4.5 per cent.
Weakness in the U.S. dollar, amid concerns over the fallout from subprime mortgage loans, was also supporting the Canadian currency.
Fears grew after Countrywide Financial Corp. -- the largest U.S. mortgage lender -- reported a steep drop in profit as mortgage banking earnings were cut in half.
With a report from CTV's Kathy Tomlinson and files from The Canadian Press
