TSX tumbles amid Bank of Japan inaction, speculation on Fed stimulus easing

TORONTO – The Toronto stock market closed deep in the red Tuesday amid concerns over what central banks can do to stimulate a lacklustre global economic recovery.

These include the failure of Japan’s central bank to unveil more measures to boost that country’s economy, whether the U.S. Federal Reserve will start to taper off its bond purchases and a court challenge on the legality of the European Central Bank’s approach to the euro crisis.

The S&P/TSX composite index dropped 159.1 points to 12,223.57, led by declines in the mining and energy sectors.

On the corporate front, Lululemon Athletica Inc. (TSX:LLL) (NADAQ:LULU) plunged 17.62 per cent to $69.22 on the Toronto market a day after CEO Christine Day said that she was stepping down.

Meanwhile, BMO analysts cut their price target on Lululemon to US$65 from $75. Analyst John Morris observed that “the board also continues its search for senior supply chain and (executive vice-president) product heads (and) we expect it to take some time to fill the all-important roles with the right people.”

Royal Bank of Canada analysts also cut their price targets on the shares, by 15 per cent to $70.

The Canadian dollar inched up 0.01 of a cent to 98.15 cents US.

U.S. indexes were also negative with the Dow Jones industrials down 116.57 points to 15,122.02, the Nasdaq falling 36.82 points to 3,436.95 and the S&P 500 index giving back 16.68 points to 1,626.13.

“The key reason for today’s sell-off is really the Bank of Japan and that they’re leaving physical stimulus efforts really unchanged,” said Jeff Bradacs, portfolio manager at Manulife Asset Management.

“I think that’s causing a broader reaction to the market when they’re also looking at the Fed . . . what is the Fed’s view on the economy and whether that means tapering off fiscal stimulus.”

The Bank of Japan started a big monetary stimulus earlier this year in an attempt to get that country’s economy out of two decades of stagnation. There had been expectations it would announce new measures Tuesday to temper the rise in government bond yields by extending the duration on its ultra-low-interest rates to banks.

Instead, the bank’s policy board merely upgraded its economic assessment and the Japanese yen strengthened at least one per cent against all its 16 major peers.

Investors have also been closely monitoring developments in the U.S. and looking for signs of whether the economic picture has improved enough for the Federal Reserve to reduce the amount of financial assets it buys in the markets — so-called tapering. The quantitative easing program, involving the purchase of US$85 billion of bonds each month, has kept interest rates low and also helped fuel a strong rally on U.S. stock markets.

Commodity prices backed off sharply Tuesday and the gold sector was the biggest drag, down almost four per cent as August bullion dropped $9 to US$1,377 an ounce, adding further losses to a component already down 35 per cent so far this year.

“For gold, if you have an improving economy, investors don’t need to be in gold stocks unless you believe in hyper-inflation and that’s not the case today with high unemployment,” added Bradacs.

Barrick Gold (TSX:ABX) faded 82 cents to C$19.99. Shares of Kinross Gold Corp. (TSX:K) fell 41 cents to $6.03 after the company announced it was halting development of its Fruta del Norte project in Ecuador after it was unable to reach an agreement with the government of Ecuador on “key economic and legal terms.”

The base metals component was 2.6 per cent lower while July copper retreated for a fourth day, down five cents to US$3.19 a pound. First Quantum Minerals (TSX:FM) fell 65 cents to C$17.37 while Turquoise Hill Resources (TSX:TRQ) dropped 29 cents to $6.31.

The energy sector fell 1.5 per cent with July crude on the New York Mercantile Exchange down 39 cents to US$95.38 a barrel. Cenovus Energy (TSX:CVE) shed 48 cents to C$30.03 and Suncor Energy (TSX:SU) was 73 cents lower to $31.07.

Outside of the resource sector, financials also weighed on the TSX as Sun Life Financial (TSX:SLF) was 47 cents lower at $29.84.

Tech stocks were also negative as BlackBerry (TSX:BB) dropped 31 cents to $13.93.

Traders also looked to the start of a two-day hearing by Germany’s constitutional court on the legality of a key European Central Bank program that has been credited with calming the 3 1/2 year-old euro debt crisis. The Federal Constitutional Court is considering arguments against the ECB’s offer to buy government bonds and lower borrowing costs for indebted countries.

Opponents of the bond-buying program say the program oversteps the ECB’s mandate, which forbids it from financing governments.

In other corporate developments, Telus Corp. (TSX:T) shares fell 45 cents to $34.26 as the telecom called off its plan to buy small wireless provider Mobilicity after Ottawa signalled last week that it would not allow the deal. Mobilicity will now go ahead with a recapitalization plan. The deal was contingent upon the federal government allowing the transfer of wireless spectrum owned by Mobilicity to Telus.

Google is buying online mapping service Waze in a deal that keeps a potentially valuable tool away from its rivals while gaining technology that could improve the accuracy and usefulness of its own popular navigation system. Financial terms of the deal weren’t disclosed. Published reports have pegged the purchase price at $1.1 billion to $1.3 billion. Google shares dipped $10.41 to US$879.81.