TSX suffers biggest one-day drop in months

TORONTO - The Toronto stock market plunged more than 400 points Wednesday, its biggest one-day drop in more than three months as investors worried that slowing economic conditions in North America and Europe will slash demand for metals and crude.

It was a broad-based retreat led by commodity stocks, but transportation stocks also fell sharply on concerns about lower commodity shipments and even the TSX energy sector backtracked despite record high oil prices.

The S&P/TSX composite index retreated 432.92 points to 14,034.11.

"The primary reason here is simply that there seems to be a disappearing level of confidence in our market," said Fred Ketchen, manager of equity trading at Scotia Capital.

"Confidence has declined in the ability of our economy to maintain its head above water, many people are growing to believe that a recession in the U.S. is probably well-established now and the spillover into the Canadian economy is going to be more severe than many had figured."

The TSX Venture Exchange was off 39.19 points to 2,596.59 while the Canadian dollar gained 0.61 cent to 98.68 cents US.

New York markets were also negative on high oil prices, factory orders that showed the weakest performance in three months in May and grim jobless news.

The Dow Jones industrial average closed down 166.75 points at 11,215.51, while the Nasdaq composite index was down 53.51 points at 2,251.46.

The S&P 500 index slipped 23.39 points to 1,261.52.

Worries about slowing economies have dogged investors for months.

There were hopes that the damage that started with the fallout from the collapsing U.S. housing sector could be contained.

But concerns about slowing global economies have heightened recently as oil prices inch closer to US$150 a barrel and show no sign of abating despite signs of lower demand.

Investors worry that high energy prices are boosting inflation, pressuring central banks to raise interest rates, which could make the economic slowdown even worse.

The European Central Bank is expected to hike its key rate a quarter point Thursday to deal with higher inflation.

"Much more so than the Fed or the Bank of Canada, the ECB is focused on overall inflation so high energy prices and a four per cent inflation rate have got the ECB spooked," said BMO Nesbitt Burns deputy chief economist Doug Porter.

The tumble on the first day of third-quarter trading on the TSX came after a lopsided second-quarter performance.

"The TSX was up 4 1/2 per cent in the first half of the year," observed Kate Warne, Canadian markets specialist at Edward Jones in St. Louis.

"But energy and materials combined were up about 24 per cent and if you do the math, the rest of the TSX is down about 17 per cent."

The base metals sector was by far the weakest TSX group Wednesday, down 7.5 per cent -- a slide that didn't come as a huge surprise to many analysts.

"The last month or so, so much has been coming out about the slowdown in the global economy and the thing that has been surprising is the lack of connection back to the mining and metals sector," added Warne.

"We've been worried about it, particularly as (the sector) kept climbing as a percentage of the TSX.

Sector heavyweight Teck Cominco Ltd. (TSX:TCK.B) lost $4.11 to $45.06 even as copper prices shot up 15.3 cents to US$4.0635 a pound on the Nymex, mainly because of a weakening greenback.

But the worst damage was reserved for coal stocks -- Fording Canadian Coal Trust (TSX:FDG.UN) lost $15.80 to $81.70 and Western Canadian Coal Corp. (TSX:WTN) plunged 96 cents to $8.

Financials were also a weak spot as investors worried about earnings prospects for banks.

The sector lost 2.16 per cent after Oppenheimer analyst Meredith Whitney predicted investment bank Merrill Lynch will rack up US$5.8 billion in writedowns for the second quarter. Merrill shares were off $1.10 to US$31.15.

Royal Bank (TSX:RY) retreated $1.83 to $44 and Bank of Montreal (TSX:BMO) declined $1.08 to $41.42.

The TSX energy sector fell 3.1 per cent despite a rise in the August crude contract in New York of $2.60 to US$143.57 a barrel.

The jump to yet another record high came even as the U.S. Energy Department reported a weekly decline of two million barrels of crude oil inventories, while gasoline inventories rose by 2.1 million barrels.

Suncor Energy Inc. (TSX:SU) dropped $2.85 to $56.35 and EnCana Corp. (TSX:ECA) moved down $2.19 to $91.17.

Talisman Energy Inc. (TSX:TLM) stepped back $1.68 to $20.90 after an oil well operated by the company off the Norwegian coast turned out to be dry.

High oil costs continued to take a big bite out of transportation companies, as the industrials sector gave back almost four per cent. Canadian Pacific Railways (TSX:CP) lost $5.45 to $62.25 and Canadian National Railways (TSX:CNR) declined $2.72 to $46.26.

Bombardier Inc. (TSX:BBD.B) gave back 20 cents to $7.21 after German engineering firm Siemens AG was reported to have pulled out of the bidding for Toronto's streetcar replacement project. Only Bombardier and a small British manufacturer submitted bids.

U.S. indexes came under pressure after payroll processor ADP estimated a loss of 79,000 jobs in the U.S. last month, deeper than the expected loss of 20,000. This comes ahead of the U.S. government's employment report for June, being released Thursday, which was expected to show the economy shed 55,000 jobs last month.

On the positive side, the U.S. Commerce Department reported that factory orders rose 0.6 per cent in May after gaining 1.3 per cent in April.

General Motors Corp. was as major weight on the Dow after it was downgraded to underperform by Merrill Lynch, which cut its price target to US$7 from US$28 and warned that "bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised." The automaker's shares fell $1.77 to US$9.98.

On the TSX, declines beat advances 1,145 to 450 with 187 unchanged as 410 million shares traded worth $8.9 billion.