08/09/2011 04:20 EDT | Updated 10/09/2011 05:12 EDT

Stock Market Roller Coaster Continues: TSX Closes Up After Volatile Day


OTTAWA - The wild financial market gyrations might keep you up at night but it's the economic darkness beneath the volatile trading that is the real monster under the bed, according to economists and the prime minister alike.

European sovereign debt and the sluggish U.S. economic growth remain the main concerns, as the U.S. Federal Reserve said Tuesday that it will likely keep interest rates at record lows for the next two years. The move by the U.S. central bank came as it acknowledged the economy was weaker than it had thought and faces increasing risks.

BMO deputy chief economist Doug Porter said the move by the Fed likely means the bank of Canada will likely keep its key overnight rate target at one per cent well into next year.

Until the recent turmoil, Porter said he thought the Canadian central bank would start raising interest rates this fall with two quarter-point rate hikes by the end of the year.

"In fact, because of the weakness in equities there has been some talk recently that there is even a remote possibility the Bank of Canada could cut rates in the coming weeks or months," Porter said.

"I still think that's a long shot, but at the very least events have conspired to keep the Bank of Canada on the sidelines for a lot longer than most had anticipated as recently as a few weeks ago."

Pension funds and individual investors alike have seen their holdings take a hit in the recent turmoil. Though markets bounced back on Tuesday, the Toronto market remains down more than 15 per cent from its high for the year set in April.

The move has wiped out billions in value for Canadians' investments and could undermine consumer confidence and spending if the downturn persists or gets even worse.

Prime Minister Stephen Harper said Tuesday during a trip to Brazil where he's promoting trade that it is too easy to focus on the money being made or lost on the stock market.

"What really matters is what we are doing here and that is focusing on mid-term and longer-term opportunities to create wealth, to create trade, to create enterprise, to create jobs.... That is what is really important."

Worries that the country's largest trading partner may slip back into recession follow a weak second quarter of growth in Canada due to slumps in mining and oil and gas production.

TD Bank chief economist Craig Alexander said a crisis of confidence could result in the exact outcome that consumers and businesses are trying to avoid.

"The question really is how much are consumers and businesses in the United States going to become convinced that economic times are deteriorating and as result they need to cut back," he said.

"Because the problem is that if consumer confidence weakens and consumers pull back their spending and at the same time businesses become less confident and they cut back from their hiring and spending you can actually cause the thing that you fear."

However Alexander noted the bounce back in the market Tuesday suggests at least some investors were optimistic.

"The most positive thing that could happen right now is a bit of a breather, a bit of a reality check and a little bit more faith," he said.

Economist David Madani of Capital Economics predicted the Canadian economy will likely rebound in the third and fourth quarters, but said the recent turmoil raises some serious worries.

"Give the severity of the moves that we've seen over the last few days, it is possible there are some downside risks to our near-term economic outlook," he said.

"If there is a negative shock on household confidence then it could lead to some weaker spending."

Madani said he will be closely watching retail sales for signs of weakness and how Canadian exports hold up amid the disappointing U.S. growth.

"And to some extent we'll also be looking at some of the housing indicators," he said.