OTTAWA - Fear gripped financial markets Monday as the fallout of a downgrade of America's credit worthiness crushed stocks and investors seeking safety sent gold to a record high.
The volatility was reminiscent of the turmoil leading up to the recesssion three years ago, but fears of a sputtering recovery also raised the prospect of stable or even falling interest rates well into 2012.
Scotiabank economist Derek Holt said the financial turmoil will help prompt the Bank of Canada to keep interest rates on hold until the second quarter of next year at least.
The Canadian central bank had been widely expected to raise rates beginning this fall — making it riskier for consumers to finance high mortgages and other growing debt. But the economic storm clouds have made that unlikely.
"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 lost nearly 492 points Monday, leaving it at 11,670.42, down more than 1,100 points or nine per cent since last Wednesday and off about 18 per cent from its high for the year set in April.
Those losses wipe out well above $100 billion in share values — and likely much more — and affected Canadians' investments and pension plans, while undermining the "wealth effect" that drives consumer confidence and spending.
Meanwhile, the Dow Jones industrials average lost just under 635 points to close at 10,809.85, down more than 1,000 points or nine per cent from the middle of last week and about 16 per cent from its high in April.
Prime Minister Stephen Harper urged Canadians not to panic from the latest stocks plunge, and said the market turmoil "doesn't change our overall assessment" of Canada's economic recovery.
"Notwithstanding the fragility of the economy and the headwinds that are there, we believe that a gradual recovery can continue," he said during a trip to Brazil.
The drop in stocks came as gold closed at a record high of more than US$1,700 an ounce higher as investors looked for shelter in the 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."
And while Cooper said the U.S. debt downgrade may be dominating the headlines, the main problems are in Europe.
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.
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 fell 1.25 cents to 100.92 cents U.S.
On energy markets, fears of an economic slowdown caused by the debt crisis dragged the price of oil down $5.57 to US$81.31 a barrel after falling $8 last week.
The Toronto Stock Exchange experienced wild fluctuations Monday morning, on its first day of trading after S&P downgraded the U.S. debt rating from AAA to AA-plus on Friday afternoon.
The Canadian dollar, now firmly established as a commodities currency, followed the price of oil sharply down, losing nearly a cent in early trading. Oil hit U.S. $83 per barrel, down more than $30 from its recent high in May.
Finance Minister Jim Flaherty noted that Canada is not immune from the economic headwinds buffeting much of the world, but the Tory cabinet minister expressed confidence that the global financial markets won't melt down this week.