The S&P/TSX composite index dropped 135.47 points to 13,582.29, on top of a one per cent slide last week, with energy stocks also sharply lower amid drops in crude and natural gas prices.
The Canadian dollar shed early gains to close down 0.32 of a cent to a 4 1/2 low of 89.99 cents US.
U.S. indexes also finished in the red as the Dow Jones industrials lost 41.23 points to 15,837.88. The Nasdaq composite index lost 44.56 points to 4,083.61, while the S&P 500 index was off 8.73 points at 1,781.56.
Traders looked to the U.S. Federal Reserve as the central bank makes its next interest rate announcement on Wednesday. At that time, the Fed is widely expected to announce further paring of its key stimulus program, the massive monthly purchases of bonds.
The Fed has already cut purchases by $10 billion to $75 billion a month and a further $10 billion cut is expected.
Emerging markets such as Turkey, Argentina, South Africa and Russia are feeling the negative effects of that tapering because the Fed's latest round of quantitative easing had flooded them with cheap money. But now, that money is exiting those areas, in turn putting severe pressure on their currencies. The worry is the contagion could spread to other markets.
Craig Fehr, Canadian markets specialist at Edward Jones in St. Louis, said emerging markets are less attractive for investors with U.S. interest rates pushing a little higher with the Fed's moves.
"So we’re seeing capital move out of those countries, pushing their currencies down," Fehr said. "These countries that have really benefited from capital (inflows) in the past couple of years are now disproportionately disadvantaged from money moving out of their markets."
The financial sector led decliners, down 1.6 per cent as emerging market turmoil raised worries about economic growth in those countries.
BMO Financial Group (TSX:BMO) is in talks to buy British investment firm F&C Asset Management in a potential deal worth roughly C$1.3 billion. Bank of Montreal (TSX:BMO) dropped $1.54 or 2.14 per cent to $70.46. Scotiabank (TSX:BNS) also racked up a loss, down $1.36 or 2.16 per cent to $61.69.
"Scotiabank is by far the most internationally exposed and really the only one that has any meaningful exposure to emerging and developing markets and I think that’s why there is more of a reaction out of that name," Fehr said.
The gold sector was also a major loser as February bullion lost 90 cents to US$1,263.40 an ounce. Barrick Gold (TSX:ABX) faded 44 cents to C$20.61 while Kinross Gold (TSX:K) declined 14 cents to $5.01.
The energy sector stepped back 1.38 per cent as March crude on the Nymex gave back early gains to move down 92 cents to US$95.72 a barrel. Cenovus Energy slid 31 cents to C$28.87.
Encana dropped 23 cents to $19.95 as February natural gas fell 33.5 cents to $4.85 per million BTUs. Prices had earlier spiked to a three-year high of $5.44 due to extreme cold covering great patches of North America.
March copper fell a cent to US$3.26 a pound and the base metals group was down 0.28 cent. Sherritt International (TSX:S) dipped four cents to C$3.54.
Techs also weighed with Open Text (TSX:OTC) $4.73 lower to $106.27.
At the same time, other analysts suggest that North American stock markets were vulnerable to a correction after Fed easing helped underpin a strong rally on many equity markets last year that left the S&P 500 alone up about 30 per cent for 2013. And the TSX financial sector bounded ahead more than 20 per cent last year.
In earnings news, Caterpillar (NYSE:CAT) reported a profit of $1 billion, or $1.54 per share in its latest quarter. That compared with $697 million, or $1.04 per share, a year earlier. Revenue declined 10 per cent to $14.4 billion from $16.08 billion. Analysts surveyed by FactSet had expected earnings of $1.27 per share on revenue of $13.41 billion and its shares soared $5.12, or 5.94 per cent, to US$91.29.
And after markets closed, Apple Inc. (Nasdaq:AAPL) released fiscal first-quarter earnings that topped analyst projections, but Apple sold fewer iPhones than Wall Street had been anticipating. Management also forecast revenue for the current quarter that fell below analysts' predictions.
Those letdowns caused Apple's stock to shed $41.62, or more than 7.5 per cent, to US$508.88 in extended trading after the release of results.
On the economic front, data showed sales of new homes in the U.S. dropped seven per cent in December to a seasonally adjusted annual rate of 414,000. But even with the pause at the end of the year, U.S. home sales for all of 2013 climbed to the highest level in five years.