TSX tumbles 99 points as traders fret over tapering of stimulus

TORONTO -- The Toronto stock market closed deep in the red Wednesday as the U.S. Federal Reserve said it doesn't plan on cutting back on a key stimulus program right now.

The S&P/TSX composite index declined 99.17 points to 12,268.29 with traders reacting negatively as the Fed also offered a slightly more optimistic outlook for the U.S. economy and job market.

That could mean that the Fed is moving closer to reducing its program of buying US$85 billion of bonds every month, but the statement gave no indication of when that might happen.

"The Fed, right now, is really trying to walk a tightrope," said George Rusnak, head of fixed income at Wells Fargo Private Bank in New York.

"They're preparing the market for tapering but at the same time they are trying to comfort the markets that it won't be too dramatic or too quick."

The Canadian dollar fell 0.6 of a cent to 97.34 cents US as the U.S. dollar and bond yields headed higher after the announcement.

U.S. indexes also tumbled, with the Dow industrials dropping 206.04 points to 15,112.19. The Nasdaq lost 38.98 points to 3,443.2 and the S&P 500 index fell 22.89 points to 1,628.92.

A cloud of uncertainty had settled over markets after Fed chairman Ben Bernanke first mentioned the possibility of tapering the Fed's monthly bond purchases during congressional testimony on May 22.

Analysts hadn't expected the Fed to make a move on tapering just yet. But uncertainty over whether the Fed feels economic conditions are appropriate for such easing, along with questions about how much the bank might cut back, have resulted in volatility where daily, triple-digit moves have become almost routine.

The bond purchases, the third round of quantitative easing embarked upon by the Fed in the wake of the 2008 financial collapse and subsequent recession, have kept interest rates and bond yields low. They have also helped keep a strong rally on most stock markets going all year.

TSX mining stocks registered steep declines amid falling prices for gold and copper.

But the utilities sector also took a hit, down 2.25 per cent. Interest-sensitive securities such as utilities, REITs, pipelines and telecoms have registered steep declines as speculation over Fed easing has hiked bond yields. On Wednesday afternoon, the benchmark U.S. 10-year bond was yielding 2.35 per cent, up 15 basis points from before the Fed statement and up sharply from about 1.6 per cent at the beginning of May.

"So in other words, the equities become less attractive," said Gareth Watson, vice-president Investment Management and Research at Richardson GMP Ltd.

"When that gap does narrow, when interest rates go up, then the dividend yields don't look as good as they once did and people tend to exit those stocks."

Atlantic Power (TSX:ATP) lost 10 cents to $4.49 and Fortis Inc. (TSX:FTS) slid 65 cents to $32.58.

The telecom sector was off 1.4 per cent with Telus Corp. (TSX:T) down $1.09 to $34.35.

Commodity prices were mixed with July copper one cent lower at US$3.14 a pound, sending the base metals group down 1.88 per cent. Teck Resources (TSX:TCK.B) dropped 93 cents to C$23.10 while HudBay Minerals (TSX:HBM) fell 15 cents to $7.59.

The tech component fell 0.8 per cent with BlackBerry (TSX:BB) down 55 cents to $14.58. The stock slid Wednesday after Bernstein Research lowered its rating to underperform from market perform. Analyst Pierre Ferragu said his channel checks at carriers showed that consumer appetite for the new BlackBerry 10 smartphones is weakening and he thinks the company will miss analyst expectations for the second half of this year.

The gold sector was down about 2.5 per cent as August bullion rose $7.10 to US$1,374 an ounce. Barrick Gold Corp. (TSX:ABX) faded 69 cents to C$18.55.

The July crude contract on the New York Mercantile Exchange lost 20 cents to US$98.24 and the energy sector dipped 0.45 per cent.

Statoil says it is evaluating a new discovery of high-quality oil about 500 kilometres northeast of St. John's, N.L. The Harpoon discovery is about 10 kilometres from the Mizzen discovery, which is estimated to hold between 100 million and 200 million barrels of oil. Statoil has a 65 per cent interest in the Harpoon discovery and the remaining 35 per cent is owned by Calgary-based Husky Energy (TSX:HSE). Husky shares were ahead 17 cents to $28.50.

The consumer staples sector was slightly higher with convenience store chain Alimentation Couche-Tard down 20 cents to $62.08. The stock has soared more than eight per cent over the past week on speculation the company could buy the retail operations of oil and gas giant Hess, which owns about 1,350 gasoline stations in 16 East Coast states.

Couche-Tard recently said it has the capacity to spend $1.5 billion on acquisitions. Hess announced in May that it will exit its retail, energy marketing and energy trading businesses following pressure from its third-largest shareholder -- activist investor Elliott Management -- to break up the firm.