TORONTO - North American markets gave up solid advances Monday and closed lower amid fading hopes that the elections in Italy, a country hit hard by the eurozone's government debt crisis, would yield a clear winner.
And that produced a wave of uncertainty over whether the next government will find it politically impossible to continue to impose the tough austerity measures that markets demand.
The S&P/TSX composite index came down from a 130-point jump to close down 50.76 points to 12,650.87 with only the gold sector providing strong support by the end of the day.
U.S. markets tumbled and the Dow Jones industrials fell 216.4 points to 13,784.17, the Nasdaq lost 45.57 points to 3,116.25 and the S&P 500 index shed 27.75 points to 1,487.85.
Early polls had raised hopes that the centre-left coalition led by Pier Luigi Bersani has claimed the most votes in Italy's election. That meant he would be in a position to form a government, possibly in conjunction with Mario Monti, the former technocratic premier who has been widely credited in the markets for dousing the country’s debt crisis.
But those hopes evaporated as the election appeared to be heading towards gridlock with Bersani’s forces moving toward victory in the lower house of Parliament while the camp of former premier Silvio Berlusconi gained the upper hand in the equally powerful Senate.
Add in the strong result of the 5 Star Movement of ex-comic turned-political agitator Beppe Grillo and fears grew that the next government will lack the will to carry on with tough reform measures.
"You don’t want to see the Italians go back, you have to keep everyone on the same track here," said Gareth Watson, vice-president investment management and research at Richardson GMP Ltd.
Italy has the second-highest level of debt among the 17 eurozone countries as a proportion of its annual gross domestic product. Only Greece’s is higher.
The TSX Venture Exchange lost 3.68 points to 1,141.
The Canadian dollar lost further ground as the Italian election uncertainty drove traders to the safe haven status of the American dollar, falling 0.65 of a cent to 97.31 cents US, its lowest close since late June, 2012.
Markets had started the day in a more optimistic mood on hopes that the Italian election would be more clear-cut and that Japan can escape its economic malaise.
Prime Minister Shinzo Abe was preparing to nominate Asian Development Bank president Haruhiko Kuroda to head Japan’s central bank. He is thought to back Abe’s strategies for seeking to revive Japan’s economy — the world's third biggest — by fighting deflation through monetary easing and hefty government spending.
There's plenty of other issues to keep investors focused this week, including the looming March 1 deadline when the sequester takes place. That's the term for a series of automatic, across-the-board spending cuts worth US$85 billion set to take place in the U.S. unless Republicans and Democrats can arrive at a more measured alternative.
The worry is that the cuts would depress already weak economic growth. But some analysts suggested that markets are getting increasingly comfortable with the cuts and that their impact won't be as bad as earlier feared.
"I do think these cuts are mainly manageable, more so than what Washington is leading us on," added Watson.
"Both Republicans and Democrats are trying to create a crisis for their own purposes and I think the market is looking through this saying, well at some point we have to cut spending, so why not start it now and stop imposing these deadlines on ourselves that we keep extending."
The gold sector led advancers, up about two per cent as April bullion jumped $13.80 to US$1,586.60 an ounce on the New York Mercantile Exchange. Goldcorp Inc. (TSX:G) rose 42 cents to C$33.64 and Barrick Gold Corp. (TSX:ABX) was up 69 cents to $31.81.
The information technology group gained per cent. BlackBerry (TSX:BB) was unchanged at cents to $13.48, off session highs after Samsung made a major move into the corporate smartphone market once dominated by the Canadian tech giant. The company behind the Galaxy line of smartphones — which along with Apple's iPhone dominates market share — announced the Samsung Knox on Monday.
MacDonald, Dettwiler & Associates rose $2.21 to $68.55.
The base metals component led losers, down 1.62 per cent while March copper gained one cent to US$3.53 a pound. First Quantum Minerals (TSX:FM) gained 51 cents to C$18.41 while Lundin Mining (TSX:LUN) shed 17 cents to $4.69.
The energy sector turned lower, falling one per cent after the April crude contract on the Nymex surrendered its early gains, losing two cents to US$93.11 a barrel. Canadian Natural Resources (TSX:CNQ) was up 18 cents at C$30.55 while Imperial Oil (TSX:IMO) gave back 49 cents to $42.43.
The financial sector also lost early lift, losing one per cent as traders prepared to take in quarterly earnings during this week from Bank of Montreal (TSX:BMO), Royal Bank (TSX:RY), TD Bank (TSX:TD) and CIBC (TSX:CM).
They're expected to be impacted by the slowdown in the housing market. At the same time, analysts expect dividend increases from most of the banks. Royal Bank (TSX:RY) fell 66 cents to $63.59 and CIBC (TSX:CM) fell 70 cents to $83.54.