Canada stocks sink on mortgage rules, retail data
SAN FRANCISCO (MarketWatch) -- Toronto's benchmark stock index tumbled Thursday, retreating amid Canadian government moves to further tighten mortgage-lending rules, reports of weak retail sales for April, and a slowdown in Chinese manufacturing.
The S&P/TSX Composite Index ($ISPTX) fell 351.02 points, or 2.99%, to finish at a new low for the week at 11,408. The selling paralleled a weak session on Wall Street, where stocks logged the 2nd worst day of 2012.
For the third time since 2008, Canada's government announced stricter mortgage regulations, to be implemented July 9.
"It's a very prudent step in addressing the household debt issue we're facing in Canada," said Francis Fong, Economist at TD Economics.
As fears of a rising interest rate environment persist, the new rules should help to mitigate the risk of more households falling into financial difficulty, Fong added.
Among the changes made, the Department of Finance lowered the refinancing ceiling to 80% from 85%, and narrowed the maximum amortization period to 25 years.
Moreover, homes prices costing greater than C$1 million will no longer qualify for insured mortgages. Mortgage payments and the total debt service ratio will also be capped.
Canada's efforts to cool the housing market pressured shares of lenders as the financial sector (TTFS) ended the session down 2.27%. A leading decliner among the nation's banks,
"Financial institutions may loose a little bit of business because of the new rules, but it's only the riskiest borrowers who will be affected," said Mathieu D'Anjou, senior economist at Desjardins.
But the metals and mining stocks (TTMN) , dropping 5.44%, and the materials sector (TTMT) , sliding 4.18%, were the main drags on the market Thursday. Commodities futures weakened in New York, weighed down by a lackluster Chinese manufacturing survey reported overnight.
"The big driver of the TSX drop this morning was the renewed pessimism about the global economy that caused another drop in commodity prices. Expectation that Moody's could downgrade some banks is also affecting the stock market," said D'Anjou.
One of the top percentage losers,
Disappointing U.S. economic data weighed on gold futures for August delivery (GCQ2) , finishing at their lowest since late May. Futures stumbled $50.30 to trade at $1,565.50 an ounce on the New York Mercantile Exchange. Read more about gold.
Further negative economic data came in Thursday as Canada's retail sales for April declined 0.5% and fell short of the 0.2% gain the market had expected. On the upside, gasoline station sales climbed 1.1%, while health and personal added 1.1% in sales. Retail volumes slid 0.8%.
Despite missing targets, TD Securities said they expect retail sales to rebound in the months ahead, "helping the theme of domestic momentum versus international weakness extend to the second quarter."
However Fong added that, "the household debt issue and uncertainty regarding what impact the European sovereign debt issue will have on Canada are weighing on consumer confidence."
In currency trading, the U.S. dollar rose on its Canadian counterpart (USDCAD) with one greenback purchasing C$1.0288, up from C$1.0193 Wednesday. The U.S. currency has gained 0.75% on Canada's loonie this year.