Stocks in Toronto took a savage beating Monday after a major U.S. investment bank was sold at a fire-sale price, but the New York markets emerged largely unscathed.
By Monday afternoon, the S&P/TSX composite index in Toronto was down 300.69 points, or 2.27 per cent, to 12,952.15. The Dow Jones Industrial Average in New York, on the other hand, was up 21.16 points to 11,972.25.
"You would think the Dow Jones Industrial Average would get the stuffing kicked out of it," BNN's Michael Hainsworth told Â鶹´«Ã½net. "But it's Bay Street that got hit the hardest."
He noted that the S&P/TSX composite index is heavily weighted to energy stocks, and crude oil fell US$4.54 to settle at $105.68.
The Canadian dollar, which rose partly on the strength of high oil prices, sank 1.33 cents to 100.07 cents US Monday.
Investors are worried that if the U.S. economy falls further, demand for oil will be dampened.
"If the U.S. problems spread to the rest of the world, then the rest of the world won't be consuming as much oil and gasoline," said Hainsworth.
But the news that jolted the market was the sale of the fifth-largest U.S. investment bank Bear Stearns -- for US$2 per share, after it was worth US$70 one week ago.
Bear Stearns had invested heavily in the subprime mortgage market and found itself caught in the resulting credit crunch.
"Just to rub salt into the wound, when Bear Stearns employees came to work this morning someone had taped a U.S. two-dollar bill to the door," said Hainsworth.
In another cruel blow, analysts say Bear Stearns employees also own 30 per cent of the investment bank's stock.
To ease the effects of the credit crisis, the U.S. Federal Reserve cut its discount rate by a quarter-point this past weekend, lowering it to 3.25 per cent, and made it easier for financial institutions to obtain emergency loans.
The move "will provide financial institutions with greater assurance of access to funds," Fed chairman Ben Bernanke said Sunday evening.
Its actions came after the purchase of Bear Stearns for US$236 million by rival JPMorgan Chase.
The Fed has a monetary policy meeting on Tuesday, and analysts are expecting a further one-percentage-point cut in interest rates.
U.S. President George Bush said Monday he backed the Fed's weekend actions.
Don Drummond, chief economist with the TD Bank Financial Group, told Newsnet on Monday he finds the current situation "kind of scary," and that the difficulties might be with the U.S. economy into early 2009. He suspected there are more Bear Stearns to come.
The impact of the U.S. credit crisis could also be felt on the other side of the planet as Asian markets took a hit. Japan's Nikkei stock average dropped 3.71 per cent, as Hong Kong's Hang Seng index fell 5.18 per cent.
Meanwhile, Britain's FTSE 100 lost 3.86 per cent, France's CAC-40 went down 3.51 per cent and Germany's DAX index fell 4.18 per cent.
