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S&P/TSX Plunges as Emerging Market Contagion Spreads

Canadian equities traded lower on Friday following growing financial instability in emerging markets.

By 11:00 a.m. Eastern Time, the S&P/TSX Composite Index (^OSPTX) was down 191.40 points, or 1.37%, to 13,741. U.S. equities traded sharply lower for a second straight day over renewed concerns that the Federal Reserve may dial back its monetary stimulus program. By midday the broad-based S&P 500 was down 20.71 points, or 1.13%.

Investors are losing confidence in some of the biggest developing nations. Countries that were once the engines of global economic growth — like China, India, Brazil, and Russia — are now a perceived source of financial instability.

The trouble started yesterday after weak Chinese manufacturing data hinted that the world’s second largest economy is slowing down. China’s flash Markit/HSBC Purchasing Managers’ Index fell to 49.6 in January, it’s worst reading since last summer. The index is based on a 100 point scale where a reading below 50 indicates contraction.

The situation in Argentina is also becoming unglued. On Thursday, worries about the country’s thinning foreign exchange reserves sparked a 15% decline in the Argentine Peso. Investors fear the country’s woes could spread to the rest of Latin America.

Finally, Turkey’s central bank resorted to direct currency sales for the first time in two years to prop up the lira. However, the effort failed to keep the country’s currency from hitting record lows against the U.S. dollar as traders fled emerging markets.

Troubles around the world also sparked a sell-off in Canadian equities.

Cyclical issues like energy and mining were off sharply. Oil behemoths Suncor (TSX:SU, NYSE:SU) and Imperial Oil (TSX:IMO) were each down 1.35% and 0.80% respectively.

Financials were also a drag on the TSX with the country’s largest financial institutions Royal Bank (TSX:RY, NYSE:RY) and TD Bank (TSX:TD, NYSE:TD) each down 1.55% and 0.98% respectively.

About the only refuge from the volatility was gold. The spot price for the yellow metal was up US$5.00 per ounce to US$1,266 as investors sought some sort of safe haven. Through this did little to hold off losses in gold miners with Goldcorp (TSX:G, NYSE:GG) and Kinross Gold (TSX:KGC) were each trading up 0.34% and 0.95% respectively in lockstep.

It was a relatively slow day on the corporate front. However, there were a few news items for investors to digest.

Barrick Gold (TSX:ABX, NYSE:ABX) proved that they are adjusting to the new realities of the precious metals market. On Thursday the company announced that it will recalculate its bullion reserves based on a gold price of US$1,100 per ounce, down from US$1,500 per ounce price it used at the beginning of the year.

The company’s move will result in a large write down as well as another impairment charge to its troubled Pascua Lama mine. Barrick shares were trading up 0.84% to $21.25.

Finally, business software maker Open Text’s (TSX:OTC, NASDAQ:OTEX) second quarter results beat analysts estimates driven by higher customer service revenue and license sales. Adjusted earnings came in at $1.58 per share during the quarter, exactly in-line with what the company reported during the same period last year.

Following the good report, Open Text’s board of directors also authorized a 2:1 stock split. The company’s shares were trading higher midday, up 13.97% to $114.21.

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Disclosure: Robert Baillieul has no positions in any of the stocks mentioned in this article. 

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