10/03/2011 08:31 EDT | Updated 12/03/2011 05:12 EST

Greek default worries to weigh on stock markets; oil, metal prices retreat

TORONTO - Canadian stock prices took another tumble Monday, losing tens of billions of dollars in value as oil prices hit their lowest level in a year and fears of a looming recession intensified/

Greece's persistent inability to put its debt crisis to rest dragged the Toronto Stock Exchange down three per cent and edged it into bear market territory.

Canada's pivotal market has lost a fifth of its value — hundreds of billions of dollars — from its highs earlier this year as investors fret about the sagging European and U.S. economies.

Earlier Monday, European markets slumped, dragging Canadian and U.S. stocks down along with them, after Greece said it will miss deficit reduction targets it agreed to as part of an earlier bailout deal.

That sent oil prices falling, another drag on the resources-focused Canadian market.

"The math (for the Greek bailout) didn't add up a year ago, and the math doesn't add up today," said Quincy Krosby, market strategist at Prudential Financial.

"The market knows that and is waiting for the Europeans to acknowledge it."

On the Toronto market, the first session of fourth-quarter trading saw, the S&P/TSX composite index drop 372 points to 11,251.84.

That put it down about 20 per cent from the highs of April — invoking the bear, the trader's metaphor for sustained investor pessimism.

Many are worried a Greek default would damage the still battered European economy and plunge the world back into recession. That sparked another selloff of oil and mining stocks, since another economic crisis would destroy demand for Canada's natural resources.

"The commodity market is really tied to the global economic recovery and so when we see a slowdown globally, it obviously impacts Canada," said Sadiq Adatia, chief investment officer at Sun Life Global Investment.

The price of oil — another big influence on the Toronto stock market — fell to its lowest since last September as the American dollar rose, with many buying up the currency as a safe place to invest cash during a crisis. That helped push the Canadian dollar down 0.26 of a cent to 95.14 cents US.

The TSX Venture Exchange dropped 77.77 points to 1,389.4.

A Greek default would have serious repercussions for the European banking system and likely derail what is already a fragile economic recovery and send it into recession. That would lower demand for oil, copper and other resources Canada produces, weakening exports and squeezing profits in Corporate Canada — eroding a main driver of share prices on the resource-heavy TSX.

U.S. markets were also sharply lower despite a snapshot on the American manufacturing sector which came in better than expected. The Institute for Supply Management's September index was 51.6, which indicated expansion and was better than the 50.4 reading that economists had expected.

The Dow Jones industrial average fell 258.08 points at 10,655.3, the Nasdaq composite index lost 79.57 points to 2,335.83 while the S&P 500 index fell 32.19 points to 1,099.23.

Worries about Greece came to the fore after the government said the country's economy will remain in recession next year, causing it to miss its original deficit reduction targets.

The 2012 draft budget says Greece's debts are projected to reach 172.7 per cent of gross domestic product in 2012 while the deficit will drop to 6.8 per cent, which is above the 6.5 per cent originally agreed with international bailout creditors.

"It's actually not a surprise," said Adatia, "because this is what the EU has been talking about in terms of getting additional funding — they said (Greece) hasn't lived up to their previous promises."

"Greece hasn't convinced itself it needs to do more."

Debt inspectors from the International Monetary Fund, European Central Bank and European Commission, known as the troika, are in Athens reviewing reforms to see if Greece qualifies to receive the next €8-billion instalment of its bailout. Without it, Greece will run out of funds in mid-October.

A stronger American dollar and demand worries sent oil well below the US$80 a barrel mark and copper prices to a 14-month low.

The energy sector fell 5.31 per cent per cent as the November crude contract on the New York Mercantile Exchange fell $1.59 to 2011 lows of US$77.61 a barrel, its lowest close since Sept. 28, 2010. Prices have dropped 15 per cent this year. Suncor Energy (TSX:SU) lost $1.48 to C$25.28 while Canadian Natural Resources (TSX:CNQ) gave back $$1.72 to $29.05.

A stronger greenback usually helps depress oil prices, which are denominated in dollars, as it makes oil more expensive for holders of other currencies.

The base metals sector retreated 6.4 per cent while the December copper contract shook off early losses to close unchanged to US$3.15 a pound after going as low as US$2.99. Teck Resources (TSX:TCK.B) declined $2.23 to C$28.69 and First Quantum Minerals (TSX:FM) fell 78 cents to $13.17.

Concerns about lower commodity shipments pushed Canadian railway stocks lower as Canadian National Railways (TSX:CNR) fell $1.65 to $68.38 while Canadian Pacific Railway (TSX:CP) dropped $2.01 to $48.51.

Worries about the European banking system pressured Canadian banks, with the financial sector down three per cent. TD Bank (TSX:TD) fell $2.92 to $71.67 while Royal Bank (TSX:RY) was down $1.28 to $46.78.

However, investors looking for safety pushed gold prices higher and the December bullion contract in New York closed up $35.40 to US$1,657.70 an ounce. But the gold sector lost early gains as Barrick Gold Corp. (TSX:ABX) faded 49 cents to C$48.62.

North American stock markets ended last week up about 150 points. But the TSX and the Dow industrials both plunged about 12 per cent during the third quarter amid increasing frustration and lack of confidence that European leaders can get a handle on the eurozone's government debt crisis. Investors also worry that the global recovery is fast running out of momentum.

Uncertainty about Greece and the global economy has left the TSX more than 21 per cent below its 2011 highs of early March. A loss of at least 20 per cent signals the market has entered bear market territory.

On the corporate front, Ivanhoe Mines (TSX:IVN) and Rio Tinto have formally told the Mongolian government they are not prepared to renegotiate an investment agreement for the Oyu Tolgoi gold and copper mine, which is under construction. The Mongolian Cabinet has asked the company and Rio Tinto, which owns a 49 per cent stake in Ivanhoe, to discuss potential changes to the investment agreement, which can only be amended by mutual consent of all three parties. Ivanhoe shares lost 96 cents to $13.49.

Paladin Labs Inc. (TSX:PLB) has dropped its attempt to acquire Afexa Life Sciences Inc. (TSX:FXA), maker of the Cold-FX cold and flu remedy, clearing the way for a bid by Valeant Pharmaceuticals International (TSX:VRX). Paladin shares were off 48 cents to $36.60, Valeant shares slipped $3.27 to $35.79 while Afexa shares dipped two cents to 84 cents.

Birchcliff Energy Ltd. (TSX:BIR) has begun shopping around for a buyer after receiving unsolicited expressions of interest. The Calgary company's board did not disclose who the parties were, or how many had expressed interest. Birchcliff currently has production of about 19,250 barrels of oil equivalent per day. Its shares surged $1.43 to $11.61.