12/14/2011 08:31 EST | Updated 02/13/2012 05:12 EST

Stocks head for flat open on Fed disappointment, rising Italian borrowing costs

TORONTO - The Toronto stock market closed sharply lower Wednesday, pressured by steep drops in the price of oil, gold and copper amid worries about the European debt crisis.

The S&P/TSX composite index racked up its third consecutive triple-digit loss, falling 216.9 points to 11,543.05 while the TSX Venture Exchange gave back 52.5 points to 1,405.93.

Gold stocks sold off despite the latest round of market nervousness, losing about 2.5 per cent as the February bullion contract dropped $76.20 to US$1,586.90 an ounce as traders forsook risk and piled into the safe haven of U.S. Treasuries.

"When risk aversion is extreme, investors still shift into the security and liquidity of U.S. Treasurys or into cash and not into gold," said Patricia Mohr, vice-president and commodity markets specialist at Scotiabank.

"Gold has been extremely volatile in the past week, every day up a lot or down a lot. I think that's probably indicative of a market where investors are not sure about the outlook for gold."

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

The stronger greenback and weaker commodities pushed the Canadian dollar down half a US cent to 96.19 cents US as traders avoided risk and bought into U.S. Treasuries.

U.S. markets also fell with the Dow Jones industrials down 131.46 points to 11,823.48. The Nasdaq declined 39.96 points to 2,539.31 and the S&P 500 index lost 13.91 points to 1,211.82.

Losses accelerated after Germany's top central banker warned that the European Central Bank should not create new money as a way of solving the eurozone debt crisis. Jens Weidmann said that making the central bank support government finances would cost it its independence. It would also cost it its credibility as an inflation fighter, Weidmann said.

Some economists believe the ECB's power to create money and buy large amounts of government bonds is the only backstop that can convince markets European countries can pay their debts.

"I think that they would be better off to allow the president of the ECB to be more supportive of financial markets in the eurozone and that might actually provide a bit more comfort, rather than these very restrictive statements," added Mohr.

Sentiment was already depressed and the euro moved below the key US$1.30 level after Italy was forced to pay higher borrowing rates to get investors to buy its bonds. The currency stood at US$1.2976 late in the afternoon after Italy paid an average yield of 6.47 per cent for investors to lend it €3 billion over five years.

The yield was up 0.17 of a percentage point from the last time Italy looked to raise money over five years and was the highest rate since 1997.

Italy has seen its borrowing costs, both in the markets and in bond auctions, rise markedly over the past few months as investors have grown increasingly worried about the country's ability to deal with its debts.

There was also residual disappointment from Tuesday after the Fed released a policy statement that made clear it was not offering any new steps to help the economy.

The Fed said that the U.S. economy, while improving, is still weak. The central bank added that unemployment remains high, and it remains vulnerable to the European debt crisis, which could push the continent into a recession and slow U.S. growth.

"(The debt crisis) is affecting Europe's economy to the point where it is detracting from any growth recoveries that we're seeing in other parts of the developed world, be it Canada or Europe or even the concerns over the soft landing that is hoped for from China," said Chris King, portfolio manager at Morgan Meighen and Associates.

"I don't see the circumstances improving rapidly, I think it's a muddle through very likely."

Elsewhere on the TSX, the energy sector fell three per cent as demand worries and a higher American currency helped send oil prices plunging over five per cent with the January crude contract on the New York Mercantile Exchange down $5.19 to US$94.95 a barrel.

Crude prices also declined amid an announcement from the OPEC cartel that its 12 oil ministers have agreed to keep the organization's output at 30 million barrels a day.

In the TSX gold sector, Barrick Gold (TSX:ABX) gave back $1.82 to $46.47.

The TSX energy sector fell three per cent with Suncor Energy (TSX:SU) down 92 cents to $28.13 and Canadian Natural Resources (TSX:CNQ) down $1.77 to $35.01.

The base metals sector was down two per cent with metal prices down sharply as the March copper contract in New York was off 16 cents to US$3.28 a pound. HudBay Minerals (TSX:HBM) fell 20 cents to $9.81 and First Quantum Minerals (TSX:FM) shed 68 cents to $18.55.

All TSX sectors were in the red with the financials sector down 0.85 per cent. Bank of Montreal (TSX:BMO) fell 46 cents to $55.12 and TD Bank (TSX:TD) dropped 66 cents to $72.40.

On the economic front, Canadian manufacturing sales fell 0.8 per cent in October to just under $48.7 billion after three straight monthly increases. Despite the decline, Statistics Canada reports October's sales were the second highest of any month in 2011, surpassed only by September.