* Financials slump, Manulife biggest influence on downside
* Late oil price rise fails to lift energy issues
* TSX retreat follows Wednesday’s 3 percent gain
* Potash gains, but forecasts weaker than expected (Adds details, comments)
By Ka Yan Ng
TORONTO, Jan 22 (Reuters) - Toronto’s main stock index slumped more than 3 percent on Thursday, driven lower by weakness in energy and financial shares, while economic news reinforced a sour tone.
The energy sector led the broad decline as the price of oil, a key Canadian export, turned lower as a U.S. government report showed crude supplies rose more than expected. Although the price recovered on U.S. stimulus hopes, shares of most Canadian oil companies remained in negative territory.
Financial issues were another big drag on the overall index, partly because of ongoing concerns about the health of the global financial system and as a series of large U.S. regional banks revealed rising credit losses led to lower fourth-quarter earnings.
Energy and financials, which make up more than half the index’s weighting, saw their biggest issues lead the way down. Among the key stocks falling were EnCana Corp (ECA.TO), Canada’s biggest energy company, which was down 4.5 percent at C$52.75.
The country’s biggest insurer, Manulife Financial (MFC.TO), fell 11.7 percent to C$19.10, while the largest bank, Royal Bank of Canada (RY.TO), fell to a 52-week low before recovering to finish down 4.9 percent at C$30.07.
“(Those sectors) comprise so much of the index, it’s just like standing in front of a freight train ... You’re best to step out of the way because they’re going to do what they’re going to do -- and the index is going to follow suit,” said Steve Ibel, an institutional equities trader at Beacon Securities in Halifax, Nova Scotia.
The Toronto Stock Exchange’s S&P/TSX composite index .GSPTSE dropped 3.1 percent, or 271.33 points, to finish at 8,486.56. All 10 of the index’s main groups were in the red.
“The financials both in Canada and the States are still looking very, very weak,” said Ibel.
“The oils have not had the best run of late either. The few bright spots if you can find some in the Canadian market is Potash ... and gold stocks.”
Fertilizer company Potash Corp. of Saskatchewan (POT.TO) reported a fourth-quarter profit that more than doubled, and its shares surged even though it issued weaker than expected forecasts for 2009. Potash gained 5.3 percent to C$91.19. [ID:nN22490347]
The price of gold turned higher in safe-haven buying, but the effect was limited on most gold issues, which have generally fared well otherwise this week.
The retreat by the composite index wiped out Wednesday’s 3 percent gain
“We had a runup yesterday in the market and we are just reversing that because the reality is there is still a lot of bad news to come out,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.
“There are so many things weighing, but ultimately it depends on consumers. And consumer confidence is low because they are hearing all this bad news about the financial services sector, and the economy is dead in the water until consumers become more positive.”
Data showed retail sales suffered their steepest drop in nearly 11 years in November, another in a long line of economic reports documenting the economy’s downward spiral.
The Bank of Canada said the recession will be harsh but shorter than previous ones as it signaled the economy is now in the most dramatic phase of its downturn. [ID:nN22537605]
It said its course of rate cuts -- cumulatively a 350 basis point reduction since December 2007 -- was done without fear of inflation expectations becoming unhinged.
Meanwhile, the U.S. economy showed further signs of deterioration as initial weekly claims for jobless benefits rose and housing starts hit a record low, while Microsoft (MSFT.O) shocked investors by posting disappointing results and warning it would cut up to 5,000 jobs.
The Dow Jones industrial average fell 105.30 points, or 1.28 percent, to 8,122.80. The Nasdaq slumped 41.58 points, or 2.76 percent, to 1,465.49. (Reporting by Ka Yan Ng and Frank Pingue; editing by Rob Wilson)