December 9, 2008 / 10:30 PM / 9 years ago

CANADA STOCKS-TSX drops on Bank of Canada recession talk

* Toronto market unable to build on previous day’s rally

* Weighty financial index leads slide with 5 percent drop

* Fall comes as Bank of Canada acknowledges recession (Adds details and comments)

By Frank Pingue

TORONTO, Dec 9 (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) fell 5.89 percent to C$35.29 and were the biggest drag on the broader index, while Bank of Nova Scotia (BNS.TO) 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. [ID:nN08525759]

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.

The S&P/TSX composite index .GSPTSE closed down 169.56 points, or 1.98 percent, at 8,397.56, with eight of its 10 sectors ending lower.

With oil prices down nearly 4 percent on concerns about shrinking global oil consumption, shares of some big-name oil-sector companies contributed to the broader index’s fall even though the energy sector ended flat.

Canadian Natural Resources (CNQ.TO) shares ended down 3 percent at C$40.90, while shares of TransCanada Corp (TRP.TO) slid 3.45 percent to close at C$32.73.

Another drag weighing on investor sentiment was ongoing Canadian political upheaval after Parliament was suspended last week until late January and the opposition Liberal Party sorts out who will be its next leader.

The uncertainty in the political landscape does little to entice foreign investors to snap up Canadian equities which, along with most other equity markets, have been under pressure with concerns about a global slowdown.

“The uncertainty in the Canadian political climate isn’t necessarily a helpful thing for the market,” said Bruce Latimer, trader at Dundee Securities. “But Toronto and New York have had a pretty good run for the last day or so and this was just a little consolidation.”

On Wall Street, investors pocketed some recent gains given rising layoffs and disappointing profit outlooks that continued to weigh on investor sentiment.

The Dow Jones industrial average .DJI fell 242.85 points, or 2.72 percent, at 8,691.33, while the Nasdaq Composite Index .IXIC ended down 24.40 points, or 1.55 percent, at 1,547.34.

$1=$1.27 Canadian Editing by Peter Galloway

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