The S&P/TSX composite index dropped 198.26 points to 11,728.41, led by declining resource and bank stocks following a four-day shutdown for the Christmas and Boxing Day holidays. The TSX Venture Exchange was down 18.6 points at 1,451.08.
Worries about a return to recessionary conditions in many parts of the world have helped push the TSX down almost 13 per cent this year.
"2011 was a good year, relatively, for the (Canadian) economy," observed Jeff Bradacs, portfolio manager at Manulife Asset Management.
He said it’s important to remember, however, how important commodities and economic growth are to the S&P/TSX.
"That’s where the concern has been with Europe and also some concern with China and its slowing growth," Bradacs said.
Trading volumes are very light this week and any event big enough to catch the attention of traders could have an amplified effect due to the low activity.
The Canadian dollar lost early momentum and closed down 0.32 of a cent at 97.64 cents US.
U.S. markets were also negative with the Dow industrials falling 139.94 points to 12,151.41. The Nasdaq dropped 35.22 points to 2,589.98 and the S&P 500 index declined 15.79 points to 1,249.64.
Worries about the European debt crisis are never far from the minds of traders, who had earlier been encouraged by a pair of successful Italian bond auctions which forced down the interest rate the country pays on its debt.
But relief was short lived as analysts pointed out that the bigger test will come Thursday, when €8.5 billion in a variety of maturities will be up for sale.
The Bank of Italy said Wednesday the average yield on its €9-billion six-month offering was 3.251 per cent, half the 6.504 per cent rate it had to pay at an equivalent auction last month. An auction of two-year bills, which raised €1.73 billion, also saw the yield fall to 4.853 per cent from 7.814 per cent last month.
The yield on the country’s 10-year bond remained dangerously high, however, at 6.93 per cent. It had risen to seven per cent Tuesday, a level that is considered unsustainable.
Italy is considered too big to rescue and investors fear that if it is squeezed out of borrowing from markets the euro won't survive.
At the same time, the European Central Bank said the Continent’s banks parked a record US$590.72 billion overnight at the bank, reflecting distrust in the European banking system.
The latest round of worry surrounding the eurozone's debt crisis pushed the euro as low as US$1.291, its weakest level on a closing basis since September 2010, down from US$1.3074 late Tuesday.
The TSX energy sector fell 1.9 per cent as the February crude contract on the New York Mercantile Exchange dropped $1.98 to US$99.36 a barrel after Washington warned Iran that it will not tolerate any disruption of traffic through the vital Straits of Hormuz at the mouth of the Persian Gulf, the passageway for one-sixth of the world's oil shipments.
Oil surged $1.66 Tuesday after Iranian Vice-President Mohamed Reza Rahimi threatened that Iran would close the strait, cutting off oil exports, if the West imposes sanctions on Iranian oil shipments to punish Tehran for its nuclear program.
Also, a senior Saudi Arabian oil official said that Gulf states are ready to step in to offset any potential loss of exports from Iran, which is the world’s fourth-largest oil producer.
Suncor Energy (TSX:SU) fell 72 cents to C$28.56 while Canadian Natural Resources (TSX:CNQ) dropped 93 cents to $36.84.
The base metals sector lost 3.34 per cent as the March copper contract in New York dipped four cents to US$3.37 a pound. First Quantum Minerals (TSX:FM) shed 87 cents to C$18.71 while Teck Resources (TSX:TCK.B) lost $1.11 to $35.17.
The gold sector fell more than four per cent as the February gold contract lost $31.40 to US$1,564.10 an ounce. Barrick Gold Corp (TSX:ABX) fell $1.68 to C$45.26 while Goldcorp Inc. (TSX:G) faded $2.14 to $43.56.
Financials also contributed to the negative showing, down 0.77 per cent with CIBC (TSX:CM) down 75 cents to $72.67. Royal Bank (TSX:RY) gave back 45 cents to $50.85.
Consumer discretionary stocks were also a weight as auto parts giant Magna International (TSX:MG) shed 90 cents to $33.25.
On the corporate front, Shoppers Drug Mart (TSX:SC) was down $1.28 to $40.72 after the Ontario government on Friday won an appeal restoring a ban on private label generic drugs in an ongoing battle with Shoppers and other big pharmacy chains.
It was the latest salvo in a battle with the drug companies over a provincial move to disallow professional allowance fees that generic drug companies paid to the retail pharmacy chains for stocking their products.
Sears Canada Inc. (TSX:SCC) shares lost $1.16 or 10 per cent to $10.40 a day after its U.S. parent company, Sears Holdings Corp., said it plans to close between 100 and 120 Sears and Kmart stores after poor sales over the holidays, the most crucial time of year for retailers. The closures do not apply to Canada.
Last month, Sears Canada laid off about 70 employees at its head office in downtown Toronto as the retailer works to overcome a loss of nearly $47 million in its latest quarter.
Moly Mines Ltd. (TSX:MOL) shares dropped 1.5 cents to 32 cents after it put its Spinifex Ridge molybdenum-copper project on hold due to low molybdenum prices and the high Australian dollar. It also said it is considering a revision of its loan structure with China Development Bank for financing of new mining projects.