TSX drops on Bank of Canada recession talk

By Frank Pingue

TORONTO (Reuters) - Toronto's main stock index fell on Tuesday as the Bank of Canada's acknowledgment that the country is entering a recession hit heavily weighted financial shares, while lower oil prices weighed on some energy stocks.

In a statement that accompanied its bigger-than-expected three-quarters of a percentage point interest rate cut, the central bank declared for the first time that Canada is now entering a recession.

The comments managed to sideswipe shares of Canadian banks and insurers given their close link to the economy, which sent the financial index down 5.34 percent and stripped it of all the gains recorded in the previous session.

"All this talk about a recession really affects sentiment for the banks and financials because they are heavily exposed to the economy," said Elvis Picardo, analyst and strategist at Global Securities in Vancouver. "And it's been frustrating for investors that the markets are simply unable to put together a string of successive advances."

The slide followed the market's 450-point rally on Tuesday and extended a pattern that has been firmly in place for months, where big gains are almost always followed by triple-digit losses.

Shares of Royal Bank of Canada (RY.TO: Quote) fell 5.89 percent to C$35.29 and were the biggest drag on the broader index, while Bank of Nova Scotia (BNS.TO: Quote) shares dropped 6.96 percent to C$32.34.

Royal Bank said after the market close on Monday that it plans to issue up to C$2.3 billion in common shares to beef up its regulatory capital ratio.

The Bank of Canada lowered its key rate to 1.5 percent, its lowest level since 1958, from 2.25 percent and said the world economic outlook had worsened in recent months and will take its toll on Canada.